Virginia’s Data Center Tax Debate: What Changed and Why It Matters

Everyone wants Virginia to be a place where families can put down roots, find fulfilling and secure jobs, and build a better future. That starts with making real investments in our communities, so everyone — regardless of their income, zip code, education, or race — has the opportunity to thrive. 

Since 2008, Virginia has provided a special tax break to some data center companies, even as individuals and families have struggled to get by. Virginia  has more data centers than any other state and has the largest cluster of data centers in the world. As the industry has expanded, communities have raised concerns about its growing demands on energy and water consumption, as well as its impacts on air quality. In recent years, many have questioned whether these companies are contributing their fair share to support our state’s schools, roads, infrastructure, and services that all of us rely on.

Those questions were central to this year’s budget debate, as Virginia lawmakers considered whether and how to ask the data center industry to contribute more fairly to our communities. After months of debate, lawmakers reached a budget compromise. The compromise marks an important first step toward asking data centers to pay more of their fair share, but it falls short of providing the lasting state revenue Virginia needs to make lasting investments in thriving communities. Here’s what lawmakers considered, what they approved, and what it means for families and communities across the commonwealth.

How data centers became central to the budget debate

Under Virginia law, data centers that meet certain standards can buy equipment such as servers, routers, and cooling systems without paying state and local sales and use tax. Because of how Virginia’s sales and use tax is structured, exempting qualifying data centers is a choice to forego revenue that would have otherwise been dedicated to our local communities, our K-12 public schools, our roads, and other investments in Virginia families. 

As data centers have grown across Virginia, so have concerns about their impacts on communities. During the 2026 legislative session, lawmakers introduced numerous proposals related to the industry, including bills on energy use, water use, air pollution, local planning, and much more. They also proposed several changes to the data center sales and use tax exemption, including tying it to new clean energy standards, limiting its use, or eliminating it altogether. Some proposals became law, many failed, and others became part of budget negotiations. The biggest disagreement was about the data center sales and use tax exemption.

What does the data center tax break cost and who benefits?

When lawmakers first approved the exemption in 2010 to attract data centers to operate and invest in Virginia’s communities, it was a more limited incentive, and expected to reduce state and local revenue by about $2.1 million in the 2009 budget year. As the industry has grown beyond expectation, so has the cost. When the exemption was renewed in 2016, it was expected to amount to $56.6 million in the 2021 budget year. Today, that same tax break has grown to an estimated $1.9 billion in the 2025 budget year — 900 times the original estimate and money that Virginia lawmakers could otherwise invest in our communities. 

The data center sales and use tax exemption is Virginia’s largest economic development expense, accounting for over half of the state’s economic development spending over ten years (FY15-FY24). Yet fewer than 100 companies benefit from it. According to the Virginia Economic Development Partnership in early 2026, 62 data center companies qualified for the exemption and 56 claimed it in 2025, and JLARC found that just five companies received 82% of the benefit in 2023. 

What did lawmakers consider?

The Senate proposed eliminating the sales and use tax exemption beginning in 2027. That proposal was estimated to generate more than $1.9 billion in state and local revenues in just two years, nearly a billion of which would go into the state’s General Fund over which lawmakers have the most flexibility. With this assumed revenue, lawmakers proposed greater investments in priorities such as public employee pay and more affordable health care and childcare. 

The House took a different approach. Rather than ending the exemption, lawmakers proposed keeping it through 2035 while requiring qualifying data centers to meet higher clean energy standards. The House assumed no revenue in their two-year budget proposal from the measure.

That disagreement delayed the budget for months. 

What made it into the final budget?

Just weeks before the July 1 deadline to adopt a budget and avoid a state government shutdown, negotiators remained at odds, though a bipartisan group of lawmakers remained strong in their conviction to eliminate the multi-billion dollar sales and use tax exemption. In the final days of the fiscal year, negotiators reached a compromise and passed a state budget. 

Instead of ending the sales and use tax exemption, lawmakers created a new tax on electricity used by data centers (1.1 cents per kilowatt hour). But the new tax is both temporary and capped. It is only scheduled to last for the upcoming two-year budget, and any revenue collected above the annual cap of $600 million will be returned to qualifying data centers. Meanwhile, data centers will continue to avoid sales tax on equipment until 2035 or later, and the cost may continue to grow.

While the compromise did not tie the exemption to clean energy standards, as the House originally proposed, it does include steps to address community concerns by setting up a framework for enforceable noise standards, new data collection requirements, and regulations on water cooling systems. 

The compromise also sets the stage for future discussions. It directed the Joint Subcommittee on Tax Policy to complete a study on data centers. The joint subcommittee will review Virginia’s data center tax policies and incentives, their fiscal, economic, and environmental impacts, and how other states approach these issues. The subcommittee will make recommendations to the General Assembly ahead of the 2027 legislative session.

A step forward, but not the finish line

While not a perfect solution, the final budget marks important progress. Virginia approved a statewide tax on electricity used by large data centers, recognizing both the industry’s growing impacts on communities and the need for the world’s largest and most profitable corporations to pay more of their fair share.

That new revenue is a meaningful win, even if it is only a fraction of what eliminating the data center tax exemption would have accomplished. This year’s budget debate also showed that sustained public engagement and advocacy can move conversations about how Virginia raises the revenue needed to invest in thriving communities.

But the work is far from over. Virginia remains the data center capital of the world, and the state continues to provide one of the industry’s largest tax advantages. As data center growth continues across the commonwealth, lawmakers must continue working to make sure the industry pays its fair share, communities have the tools to address the industry’s impacts, and Virginia has the ongoing revenue needed to make lasting investments in schools, health care, transportation, and other public services that every community deserves.

Categories:
Budget & Revenue, Economic Opportunity