Much of the current impasse over Virginia's budget hinges on whether the state's business reputation will be thrown into question if a sales tax exemption benefiting data centers is ended earlier than scheduled.
Virginia provides a lucrative tax break for data centers, exempting certain computer equipment from state sales taxes. It was first implemented in 2008 and exempted the industry from paying between $1.6 billion and $1.9 billion in fiscal year 2025. (Computer equipment makes up most of the investment involved in running a new data center.)
The General Assembly gaveled out of its 2026 regular session in March without a statewide spending plan in part over a dispute around the exemption. The Virginia Senate is seeking an early end to the tax break, which is set to run until June 30, 2035; both the House of Delegates and Gov. Abigail Spanberger have said they would prefer it to continue.
Much of their argument centered on the potential hit to Virginia's standing as a business-friendly state. Curry Roberts, a former secretary of economic development (now known as the secretary of commerce and trade), shared that concern.
"In terms of reputation, I think the debate they've already had has done damage to Virginia's reputation," Roberts said of the General Assembly. "If there's uncertainty in one state and they can get certainty in another state that seems to be very consistent with their policy, [businesses are] going to go where they get consistency."
Critics of the sales tax exemption point to agreements with the Virginia Economic Development Partnership to argue the exemption is not, in fact, a guarantee.
Former Del. David Ramadan, a professor at the George Mason University Schar School of Policy and Government, says the argument that Virginia is going back on its commitments is mostly "spin," pointing to memoranda of understanding on the VEDP website.
"There are no guarantees that these data centers will exist or these tax credits will exist for the duration of the time. That's in every memo signed," said Ramadan. According to him, sunsetting the tax exemption early has "been talked about for two or three years now. It's no surprise. So, again, that's why it's more of a spin than it is a reality."
The VEDP memos have companies sign off on an acknowledgement that the tax exemption could be subject to change.
"Changes made by the General Assembly in the applicable provisions of the Virginia Code, including any change to the Sunset Date of the exemption, will be read into, and will be deemed to amend, this MOU. VEDP will provide the Company with written confirmation of any such change upon request," reads the agreement.
Still, Roberts said, while the MOUs set up a legal framework that allows the state to change the tax exemption without going back to companies for a new contract, what is legal and what is right for the commonwealth's business relationships aren't always the same. "If I'm only going to be held to a standard in a relationship that I'm going to do the legal thing, that may not be the right thing for the relationship," he said. "This is a relationship business. It's not built on legal. It's built on reputation and relationship."
For the time being, it appears that many data center projects are not being put on ice. Several data-center related projects are being considered in Prince William County, for example. Northern Virginia alone is host to over 250 data centers, according to the Northern Virginia Regional Commission.
But others are being thrown into question, like the $100 billion Berry Hill project in Southside Virginia, a region that is finally seeing notable growth in its own data center economy.
During a May 19 meeting of the Virginia Senate Finance & Appropriations Committee, Secretary of Finance Mark Sickles said Compass Datacenters, which has a large facility in Northern Virginia, cited "the current legislative and political environment" in saying it would redirect "all further investment outside of Virginia."
Tim Hamilton, a professor of economics at the University of Richmond, said the data center incentive works "on the margins" by attracting a subset of businesses that didn't plan to build in Virginia because they are attracted by existing infrastructure and power availability.
"I've seen estimates of that fraction ranging from 5% to 7% to 25%, in terms of the number of firms that are here because of the tax incentives," he said. "I don't think there's any good evidence that all of these firms are here because of tax incentives, and that this would just completely disappear without them."
Still, Hamilton told VPM News that an early end to the tax exemption could have downstream effects on Virginia's business reputation at large, across all industries.
"I think in the short term, not a big deal to go back on that — the effect would be minimal — but in the long run, I think it could have some serious negative consequences," he said.
July 1 will be the beginning of the new fiscal year, and the 2026–2028 fiscal year budget runs from then until June 30, 2028.
On May 18, Gov. Abigail Spanberger directed administration officials to estimate how much money the state will take in until June 30, 2031. That request improved Virginia's revenue forecast by $1.5 billion through fiscal year 2028, which could provide more room for an agreement, but in the May 19 meeting, Senate Finance Chair L. Louise Lucas (D–Portsmouth) said she was "concerned" with that move.
"The administration is focused on a forecast, but we are faced and focused on the policies around who pays their fair share of taxes and how the businesses that we attract to Virginia treat our citizens and resources," she said. "I remain committed that data centers, who employ very few permanent jobs for a sizable tax giveaway, will pay sales tax on computer equipment."
In a March letter to Lucas and other budget negotiators, Spanberger cited Virginia's business environment as a concern of hers.
"I know we share a commitment to protecting Virginia's fiscal integrity, upholding our commitments to businesses that we have invited to invest in the Commonwealth, and maintaining the AAA bond rating we have held since 1938," she wrote.
Lisa Washburn, a managing director at the independent municipal research and consulting firm Municipal Market Analytics, said that sunsetting the tax exemption early would have a positive impact on revenues, since data centers would begin paying sales tax on computer equipment. That would factor into how ratings agencies consider Virginia's bond rating.
"I think that the idea that a rating would be so contingent upon one policy decision, it kind of misses the point of the holistic approach of the rating analysis," she said. "Any particular policy choice comes with positives and negatives and is unlikely to have an immediate impact on the rating."
But, she added, if the exemption had a negative impact on economic growth, it would also play out over time — giving the Legislature time to respond.
Virginia's government is funded through June 30, but lawmakers need at least three days to legally consider a budget before passage, and then Spanberger has 30 days to recommend changes.
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