Virginia budget with data center tax moves to Spanberger’s desk

Averting a potential state government shutdown, Virginia legislators passed a $207 billion compromise budget Monday that includes an electricity consumption tax on data centers that will bring in $1.2 billion in revenue over the next two years.

Included in the finalized biennial budget passed by the House of Delegates and the Virginia State Senate on Monday is a tax of $0.011 per kilowatt hour of power used by each data center per month, but only up to $600 million per fiscal year. It will take effect July 1.

Any other tax revenue beyond $600 million will be returned to data center operators.

The budget also includes the previously announced cannabis recreational retail framework, allowing legal sales to start in July 2027.

Next, the budget will go to Gov. Abigail Spanberger‘s desk, where it is expected to be signed in time for the June 30 deadline. Despite Democratic control of both legislative bodies and a Democratic governor, the conflict over data centers dubbed “a civil war among Democrats” by House Speaker Don Scott threatened to shut down the state government for the first time in Virginia history, if a budget was not passed before July 1, the start of the next fiscal year.

“Today, the General Assembly has moved forward with a budget proposal — and that means we are keeping our government open and delivering for the 8.8 million people who call our commonwealth home,” Spanberger said in a statement Monday. “There is a lot to be proud of in this budget. It delivers raises for our teachers and public employees, makes new investments in our schools, includes a RGGI credit for residential customers and small businesses, and takes other tangible steps to make Virginia more affordable — all while protecting families from the devastating cuts in the so-called ‘One Big Beautiful Bill.'”

The idea of a data center tax assessment arose last week as a potential compromise between the Virginia State Senate, which advocated for a repeal of the sales and use tax exemption for data centers that now costs the state more than $1 billion annually in tax revenue, and Spanberger and the House of Delegates, which did not want to repeal the incentive without a study to discuss impact on the state’s business interests.

Last week, Sen. L. Louise Lucas, the Virginia Senate’s president pro tempore and chair of the Senate Finance and Appropriations Committee, held several town halls with other state senators in Northern Virginia, Hampton Roads and the Richmond area. She called for data centers to “pay their fair share,” instead of continuing to receive tax breaks that went into effect in 2010 and are set to sunset in 2035.

On June 16, the idea of a two-year $1.7 billion “impact fee” assessed to data center developers instead of the exemption’s repeal was discussed as a possible option at the Senate Finance and Appropriations Committee meeting, but ultimately the tax was limited to $1.2 billion over the next two years.

According to state finance staff estimates, Virginia is expected to see a $1.3 billion cost associated with the data center tax exemption in fiscal 2027, $1.35 billion in fiscal 2028 and up to $1.79 billion by fiscal 2032.

“Importantly, this budget positions the commonwealth to be a national leader on data centers,” Spanberger said Monday. “For the first time anywhere in America, Virginia will institute a statewide energy consumption tax on data centers — an idea I first proposed this spring — to ensure this industry pays its fair share and does not drive up costs for Virginia families. This is a compromise proposal — one my administration helped craft — and it builds a strong foundation for further discussions about the future of this industry in Virginia on issues like environmental and community impact.”

Despite the exemption’s survival, the Virginia-based Data Center Coalition criticized the new tax.

“At a time when Virginia badly needs new jobs and investment, the General Assembly is adding more than a billion dollars in unnecessary new taxes that will raise costs on Virginians and Virginia businesses, drive away investment and job creation, and tarnish Virginia’s reputation as a reliable partner and a good place to do business,” said Josh Levi, the coalition’s president and CEO. “There appears to have been no serious consideration given to the feasibility of the budget’s onerous new regulations or what impact they may have on job creation, investment and Virginia’s economy.”

Environmental groups also found fault with the plan.

“Virginia lawmakers are once again choosing delay and half-measures over real leadership,” said Victoria Higgins, Virginia director of the Chesapeake Climate Action Network Action Fund. “This budget doubles down on a failed approach, offering more studies instead of solutions, handing out hundreds of millions in subsidies to some of the wealthiest corporations in the world, and opening the door to targeting low-income communities for harmful development.

“Let’s be clear: A noise study will not lower utility bills. A water study will not protect families already facing rising costs and strained infrastructure. And $600 million a year in subsidies will not make Big Tech more efficient; it will continue the unchecked growth.”

In other budget news, the General Assembly allocated $20 million for a Southwest Virginia inland port to be built in Washington County, with funding earmarked for project planning, design and site development. Additionally, state employees will receive 3.5% pay raises, up from 2%. The budget also adds $225 million to the Federal Uncertainty Contingency Fund established by the House, funds that would be used to “address any further federal retrenchment, as well as to mitigate forecast adjustment for Medicaid and the ACA premium assistance program.”

Despite the compromise, Senate Democrats said they’re not done discussing data centers.

“This conference report took longer than most, but the Senate conferees and I spent a lot of time trying to find the right balance between compromising with the House and the governor and having something that made the data centers pay their fair share,” Lucas said Monday before the Senate floor vote on the budget. “However, let me be clear: I will still continue to look at this data center issue with our work group this year, and I plan to continue my listening tours with the people across the commonwealth of Virginia.”

Sen. Danica Roem, a Democrat who represents part of Prince William County, where dozens of data centers are in operation and others are in the pipeline, said she plans to file budget legislation next year to repeal the sales and use tax exemption, as she has the past four years in office.

“It is so critically important that we are not subsidizing corporate greed with multitrillion-dollar industry players,” Roem said. “We cannot afford to keep giving away billions of dollars to the richest corporations in America. That is not sustainable.”

The Senate passed the budget bill 23-16 with support of all Democrats and two Republican senators, and the House passed the legislation Monday afternoon with a 71-22 vote.