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Virginia senators have voted to eliminate a data center tax exemption projected to cost the state $1.6 billion annually, escalating a fight over an industry that has transformed the commonwealth while placing growing demands on communities and the power grid.

The proposal would require data center operators to pay Virginia’s sales tax of at least 5.3% on equipment and software. Opponents warn the change could abruptly stop new construction, while supporters argue the booming industry no longer needs such a substantial incentive.

Virginia introduced the exemption nearly two decades ago. Over the following 18 years, it became the world’s largest data center hub as technology companies built sprawling campuses filled with servers, cooling systems, electrical substations and backup generators.

The expansion has brought complaints about noise and other local effects. More recently, the growth of artificial intelligence has increased electricity demand and added pressure to the power grid.

Republican Sen. Mark Obenshain said opposition has moved beyond “Not In My Backyard” sentiment into what he called the “banana” phase: “Build Absolutely Nothing Anywhere Near Anything.”

Industry warns investment could stop

Virginia’s tax department says the industry has invested more than $80 billion in the state and created thousands of jobs during the past two years.

The Data Center Coalition, which represents major technology companies, said ending the exemption would “effectively halt investment.” Amazon Data Services underscored the industry’s continuing interest this month by purchasing George Washington University land in Northern Virginia for a data center, officials said.

Gov. Abigail Spanberger’s office also expressed concern, saying the state should be cautious about reversing commitments made to companies that have invested in Virginia.

Democratic Sen. L. Louise Lucas, the Senate Finance Committee chair and a supporter of ending the exemption, responded by pointing to the difficult choices facing budget negotiators. She asked whether lawmakers should instead remove teacher raises, health insurance assistance, transit funding, a tax rebate or child care slots.

The disagreement has divided Democrats as the General Assembly approaches its budget deadline. House Democrats favor retaining the exemption, while lawmakers have until Saturday, when the legislative session is scheduled to end, to approve a spending plan.

The Senate measure received bipartisan support from 21 Democrats and seven Republicans.

Republican Sen. Richard Stuart rejected predictions that the repeal would derail development, saying it would not slow the industry’s momentum “one iota.”

States reconsider data center incentives

State and local governments have long used sales tax exemptions and property tax abatements to attract data centers. Those incentives can allow developers to purchase expensive servers, routers, cooling equipment and, in some places, construction materials without paying taxes.

But the scale of newer facilities has prompted growing resistance across the country. Some campuses occupy more land than factories or stadiums, and certain data centers require more electricity than a small city.

Minnesota lawmakers last year ended the electricity sales tax exemption for the largest data centers, added a fee based on power use and strengthened oversight, including reviews of water consumption.

Washington state lawmakers are considering preserving incentives for new facilities while ending them for existing data centers replacing or upgrading equipment. The change is projected to generate $83 million for the state during its first year.

Illinois Gov. JB Pritzker called last month for a two-year pause in data center tax breaks, citing rising residential electricity bills. Arizona Gov. Katie Hobbs has sought to eliminate her state’s sales tax exemption entirely, describing it as a corporate handout.

Legislation to repeal data center incentives has also been introduced this year in Michigan and Georgia as well as Arizona. Georgia lawmakers approved a two-year pause on the state’s exemption for building and equipping data centers in 2024, but Gov. Brian Kemp vetoed it.

Organized labor is among the groups urging Virginia lawmakers to retain the incentive. The International Brotherhood of Electrical Workers lobbied at the statehouse in support of the industry.

Virginia electrical worker Dorian Hargrave warned that losing data center investment would deliver a major blow to the state’s economy.