The Virginia General Assembly adjourned on March 14 without a biennial budget in place. On Monday, June 22, the House and Senate met to finally vote on an appropriations bill. The looming deadline to avoid a shutdown was July 1. Each chamber passed a conference report 23-16 in the Senate and 77-21 in the House. As of the writing of this article, the Governor has not signed the budget or made any amendments. However, she did express support for the budget overall and stated publicly that her administration helped craft it.
This is certainly not the first time the Commonwealth has left Session without a budget in place. One of the most notable budget fights occurred in 2006, during Governor Tim Kaine’s first year in office. At the heart of budget discussions 20 years ago was statewide transportation funding. This year, the impasse was caused by tax exemptions for data centers.
It has been said numerous times before, and it remains true: the budget is the single most important bill. This article is only looking at one significant decision made within a budget, which includes the legalization of the recreational use of cannabis. Let’s take a quick look at the legislative history of data center taxes in the Commonwealth before summarizing the key components of the compromise that averted (if signed) the first shutdown in the history of the Old Dominion.
The first sales and use tax exemption was enacted following legislation from the 2008 Session. HB1388 and SB668 were introduced by Delegate Tommy Wright and Senator Frank Ruff, respectively. This original tax exemption for data centers applied only to facilities that were placed in localities with an unemployment rate of 4.9% or more. The expected fiscal cost to the state was anticipated to be only $1.54 million, a small cry from the $1.9 billion discussed during this budget negotiation.
In the next Session, the Virginia General Assembly passed SB944. The qualification for tax-exempt status was changed to require $150 million in capital investment and the creation of 50 new jobs. This exemption was scheduled to sunset in 2020.
In 2010, several bills made further alterations to the qualifications, including lowering the jobs-created threshold to 25 if located in a locality with an unemployment rate for the preceding year at least 150 percent of the average statewide unemployment rate.
In 2016, the tax exemption was extended to 2035. Governor McAluffie recommended two sunset dates. This amendment was rejected. In his recommendation, data centers in areas with an unemployment rate at least 120 percent of the statewide average would retain their exemption through 2035. All other data centers would see their exemption end in 2028.
In 2021, the General Assembly established a new standard for qualifying for the tax exemption for data centers located in distressed localities. A distressed locality was determined by a combination of the unemployment and poverty rates. The job threshold for these projects was reduced to 10 jobs, and the capital investment requirement was reduced from $150 million to $70 million. Even at this point, the estimated budget impact was $133.4 million.
Following the data center boom, the Joint Legislative Audit and Review Commission (JLARC) drafted and released an in-depth report in late 2024. This included an extensive list of policy recommendations and considerations for the General Assembly. Among the potential policy considerations was a determination as to if companies should be required to meet energy standards as a condition of receiving the tax exemption and a question about whether to let the exemption expire in 2035 or extend it out to 2050.
In his outgoing budget for the 2026 Session, Governor Youngkin proposed extending the exemption from 2035 to 2050. This, like many of his budget proposals, was scrapped by the General Assembly. The original Senate budget proposed ending the sales tax credit by 2027, a drastic contrast to the Governor’s proposal and industry expectations. The House stance favored strict environmental standards and prohibitions on co-locating with gas plants. As negotiations continued into the summer, each chamber unveiled new budgets with new policy decisions on data centers. The House’s mid-June proposal created a Commission to study the benefits and impacts of data centers, with a report being released on November 1 of this year. The Senate shifted from ending the tax exemption to a tiered impact fee system. The tiers were structured as shown below:
- $45.00 per permitted kilowatt electrical (kWe) on any Tier 1 and Tier 2 generator
- $37.00 per permitted kWe on any Tier 2 backup generator retrofitted to be a Tier 4-equivalent backup generator, Tier 3 generators, and any generator powered by natural gas
- $35.00 per permitted kWe on any Tier 4 generator or any other generator.
After these new positions were announced, negotiations intensified. The final conference report that was passed by both chambers includes the following on data centers:
- The Sales and Use Tax exemption remains in place. The new budget, however, introduces an electricity consumption tax on data centers. This monthly tax will be collected at a rate of $0.011/kWh of all electricity consumed. The deposits are limited to $600 million of revenue to the general fund. Excess revenue will be refunded on a pro rata basis to each payer after the close of the fiscal year. The Governor specifically noted her in public comments that the energy consumption tax was a concept she supported in the spring.
- Directs the Joint Subcommittee on Tax Policy to review the sales and use tax exemption and other impacts from data centers, and make recommendations. This report with recommendations is due December 15, 2026.
- Requires DEQ to establish criteria for identifying “Cooling Water Scarcity Areas” to minimize data center impacts on water resources.
- Requires DEQ to adopt regulations to set noise standards for data centers.
- Directs the SCC to collect data on energy, water, and generator usage of data centers. This report is due October 1, 2026.
The discussions on data centers will continue throughout the year and into next Session, as several members have already promised to reintroduce budget amendments to eliminate the tax exemption.
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