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A clash over Virginia’s lucrative data center tax exemption prevented the General Assembly from passing a state budget before its regular session ended March 14, forcing lawmakers to return to Richmond for a special session.

Gov. Abigail Spanberger said she plans to call legislators back April 23 to settle the dispute and approve a spending plan.

“I remain in close contact with leaders in the General Assembly, and I look forward to calling lawmakers back to Richmond on April 23 to pass a budget that delivers on the responsible, pragmatic leadership Virginians voted for this past November,” Spanberger said.

At issue is a sales tax exemption for eligible data center computer equipment and software. Virginia introduced the incentive July 1, 2010, helping the state become the world’s largest data hub over the following years. Without the exemption, purchases are generally subject to a 5.3% sales tax, with higher rates in some regions.

The tax break is currently scheduled to remain in effect through June 30, 2035. A majority of the Senate wants to end it early on Jan. 1, 2027, pointing to an estimated $1.6 billion in forgone revenue. The House rejected that approach, and negotiators failed to reach an agreement before the regular session adjourned.

House warns of economic fallout

House Appropriations Chair Luke Torian argued March 12 that eliminating the exemption could damage Virginia’s standing with businesses.

Torian cited Joint Legislative Audit and Review Commission research estimating that data centers support 74,000 jobs, generate $5.5 billion in labor income and contribute $9.1 billion to Virginia’s economy each year. He also pointed to more than $2 billion in annual local tax revenue.

“But eliminating the sales tax exemption would cost Virginia far more than lost tax revenue,” Torian said. “Virginia’s reputation as a reliable place to do business would be called into question.”

Industry supporters have also cited Virginia Economic Development Partnership estimates that ending the incentive for new data center investments could cost the state $1.2 billion in tax revenue over five years.

Spanberger’s office expressed concern about reversing commitments made to companies that invested in Virginia.

Senate leader refuses to retreat

Senate Finance and Appropriations Chair Louise Lucas has remained firmly behind ending the exemption. Although she voted for the incentive in 2009, Lucas said it “was never meant to last forever.”

She highlighted Amazon Data Services’ recent $427 million purchase of George Washington University’s Loudoun campus as evidence that the industry can afford to pay more.

“One data center for one company can afford to pay $427 million dollars for land alone – but the entire industry says it doesn’t have the money to give back their tax break that costs Virginia schools one billion a year,” Lucas wrote on X. “I WILL NOT back down from this fight.”

Responding to the governor’s position, Lucas asked which Senate priorities should instead be removed from the budget, naming teacher raises, health insurance assistance, transit funding, a tax rebate and child-care slots.

The fight comes amid wider concern over the enormous power demands of data centers and the potential effect of artificial intelligence infrastructure on household electricity bills. Modern campuses can include sprawling server warehouses, substations and backup diesel generators, with some consuming more electricity than a small city.

Fairfax proposal draws local scrutiny

Opposition is also growing in Fairfax County, where environmental advocates are questioning a proposed sale of part of a county-owned property at 3721 Stonecroft Blvd. in Chantilly to data center developer Starwood Capital Group.

Before a Board of Supervisors public hearing on the proposal, the Great Falls Group of Sierra Club Virginia urged county leaders to reject the current agreement and create a public process to consider the vacant property’s future.

Group Chair Douglas Stewart and Land Use Chair Ann Bennett said the county might ultimately decide that the proposed sale and data center use are appropriate. However, they argued that such a decision should follow a transparent review of the advantages, disadvantages and alternative uses, along with competitive bidding to ensure taxpayers and residents receive a sound deal.

Virginia lawmakers are scheduled to reconvene April 23, when they will again try to bridge the data center divide and finalize the state budget.