Virginia House and Senate clash over data center tax breaks

Budget negotiations in Richmond are at a standstill just one day before the Virginia General Assembly is scheduled to adjourn. The problem is a fight between state senators and delegates over continuing tax breaks for data centers.

Senate Democratic leaders want to eliminate the incentive, known as the Data Center Retail Sales and Use Tax exemption. At the same time, House lawmakers and business groups argue that doing so could threaten investment in one of the state’s fastest-growing industries.

The tax exemption, first approved by the General Assembly in 2008 and implemented in 2010 to attract large-scale data center investment, allows companies to avoid paying Virginia’s sales tax on computer equipment and software used in data centers. The exemption isn’t set to expire until 2035, but the state Senate has proposed expiring it on Jan. 1, 2027 — eight years ahead of schedule.

The American Edge Project reported in late 2025 that Virginia has more than 660 data centers in operation and nearly 600 more planned.

In a January report to the General Assembly, Tax Commissioner James Alex said data center operators reported about $33.2 billion in equipment and software investments eligible for the exemption in fiscal year 2025, representing roughly $1.9 billion in total sales-tax benefits. Of that amount, about $1.6 billion reflects forgone state revenue, according to Virginia’s 2025 Annual Comprehensive Financial Report.

At a Senate Finance and Appropriations Committee meeting in February, committee chair Sen. Louise Lucas said: “No one could have predicted this rapid growth, and it will only continue to grow exponentially alongside continued investments in artificial intelligence.”

“As data centers have expanded, Virginians have become increasingly concerned about subsidizing their energy demands and mitigating their environmental impacts,” Lucas said. “We’re asking data centers to pay their fair share in sales tax to help deliver our core services — education, transportation and social services. Investing in Virginia requires investing in the infrastructure that supports them.”

House Appropriations Chair Del. Luke Torian, D-Prince William, said on the House floor Thursday that the deadline for a budget conference agreement had arrived, but “there will be no such agreement at this time.”

Torian said the Senate has insisted the budget cannot be finalized without eliminating the data center sales tax exemption — a position he said the House cannot and should not agree to. He warned repealing the incentive could damage Virginia’s business reputation.

“Virginia’s reputation as a reliable place to do business will be called into question,” Torian said. “Companies across industries, not just the data center sector, may begin to wonder whether Virginia is a partner they can depend on.”

Lucas responded to Torian on X, her preferred social media platform: “Next year I’m going to help our House of Delegates members get on social media so they can keep up. As you know I’ve been saying for weeks now that we will not pass a budget that puts data centers’ tax breaks ahead of hard-working Virginia families and I am not backing down now.”

Business organizations respond

The proposal has ignited controversy outside of the legislature, with the Virginia Chamber of Commerce and dozens of business groups throughout the state issuing a letter this week urging the General Assembly not to advance the Senate’s proposal, saying it would do “significant damage” to one of the state’s most economically impactful industries and deter businesses from locating or expanding in Virginia. The letter notes that, per a 2024 Joint Legislative Audit and Review Commission study, the data center industry is estimated to contribute 74,000 jobs, $5.5 billion in labor income and $9.1 billion in GDP to Virginia’s economy annually.

The letter also argued that Virginia’s reputation as a business-friendly state hinges on the belief that the commonwealth is “true to its word” and keeps its commitments. It noted data center developers and operators have invested hundreds of billions of dollars in Virginia, with billions more in the pipeline.

“Virginia’s reputation as a top state for business is built on trust and predictability,” Virginia Chamber Interim President and CEO Keith Martin said in a statement to Virginia Business. “Repealing the sales and use tax exemption after companies have already made major investments would raise serious concerns about the commonwealth’s reliability and long-term competitiveness.”

RVA757 Connects President and CEO John Martin echoed those concerns, saying, “Changing the rules midstream is just unfair to businesses that have made investments in good faith.” He said more than 30 states offer exemptions on data center equipment, which he argued has become “table stakes” for attracting investment.

Gov. Abigail Spanberger has expressed concerns about repealing the exemption, while still asserting data centers should be “paying their fair share,” as she said in a media scrum this week. She also noted that lawmakers are discussing a consumption tax that would charge data centers for the energy they consume.

“The governor has also made clear that Virginia should not be going back on agreements it has signed with companies that have brought business investment and substantial economic development to the commonwealth,” a spokesperson for Spanberger’s office said in an email. “Gov. Spanberger believes there is a path forward in budget negotiations that keeps Virginia’s commitments while also making sure data centers pay their fair share of taxes and energy costs. As discussions move forward, the governor will remain in close contact with leaders in the House and Senate.”