Budget negotiators from the House of Delegates and Virginia Senate have agreed on a spending plan that would further tax data centers' energy use, ending three months of deadlock that escalated to the point of Democrats publicly criticizing each other.
Data centers in Virginia will not lose a lucrative tax break that was the fault line between the Senate and the House, but will still have to pay an estimated $1.2 billion in energy taxes toward the General Fund for the next two years.
While technically a compromise, Senate Finance Chair L. Louise Lucas (D–Portsmouth)'s push for data center revenue resulted in more going to state coffers than in her original proposal, which would have added $977 million in revenue for the two-year budget.
"This budget agreement reflects our shared commitment to making Virginia more affordable for families," said Lucas and her House counterpart, Del. Luke Torian (D–Prince William), in a statement Friday night. "At a time when too many households are feeling squeezed by rising costs and economic uncertainty, this conference report makes historic investments to lower costs, strengthen our schools, protect access to healthcare, expand economic opportunity, and maintain the Commonwealth's strong fiscal foundation."
On Monday, legislators will convene for a vote on the $207 billion spending plan that runs from July 1, 2026 to June 30, 2028.
While data center companies will be paying more, the budget advances tax cuts across the board through a permanent increase to the standard deduction. It also includes backstops for Virginians relying on federally-funded public benefits, and pay increases for state employees.
Built in: raises, childcare and 'economic uncertainty'
The deal puts $1.5 billion toward 4% pay raises for public school teachers and 3.5% raises for state employees, $137.6 million for additional Child Care Subsidy Program slots, for families making up to 85% of state median income, and adds an additional $159 million in school construction grants than last budget's total.
There's also hundreds of millions of dollars for what a House summary called a "hedge against federal/economic uncertainty."
Those monies are mostly geared toward healthcare funding: $200 million for Virginia's self-funded health insurance fund, $350 million for preparations ahead of Medicaid changes, and $150 million for premium assistance to those losing federal ACA subsidies.
The budget compromise would also put $225 million in a fund that state agencies can apply for relief from reductions in federal funding.
Locally for Greater Richmond, there's $50 million for the Combined Sewer Overflow Project, $15 million for the demolition of the Richmond Coliseum and $10.6 million for work at Chesterfield County's Shoosmith Landfill.
The budget also utilizes "Part 5" to make permanent changes to state law (generally, the budget's changes only last for two years). Beyond increasing standard deduction, those ongoing changes include standing up a legal retail cannabis market and a 1% optional school construction tax for localities.
Kicking the data center can
While the new data center tax is a compromise, it appears to be a temporary one since it only runs for the two-year budget. Budgeters, including Gov. Abigail Spanberger, would likely need to replace the $1.2 billion the new energy tax is set to generate during the next budget cycle. (Virginia's fiscal year runs July 1–June 30.)
VPM News asked Spanberger in an interview last week if the debated sales and use tax exemption could become too expensive, but the governor did not directly answer the question.
"It is a question of, 'What does the exemption do?'" she told VPM News.
"We, as a commonwealth, have certain incentives that we put in place in order to attract business and the investment that comes with them. It is the state's choice to forgo collecting one particular type of tax, while those same data centers pay local sales tax and local property tax. That equates to billions upon billions of dollars that flow to local communities."
Disagreements over the state budget despite a party-unified administration first emerged in February, when Lucas announced that the Senate would be pursuing early sunset of a tax exemption for certain data centers' computer equipment.
The House's draft spending bill left the tax exemption, which expires in 2035, in place.
Up until the last moments of the regular session in March, lawmakers and Big Tech lobbyists were negotiating over a budget. No deal was reached, and the General Assembly adjourned without passing one, instead going into a special session to allow for negotiations after the session clock ran out.
But Lucas and Torian — the heads of their respective chambers' finance committees — largely did not meet over the past few months. And as time went on, Virginia Democrats began to turn on each other in public.
On social media, Lucas also repeatedly called Virginia House Speaker Don Scott (D–Portsmouth) and Gov. Abigail Spanberger names.
Spanberger implied in her recent interview with VPM News that Lucas was holding up the process over one issue. And last Tuesday, the governor reportedly snubbed two state senators whose bills were slated to be signed over their involvement in a Lucas-led speaking tour.
The tax exemption has supercharged the growth of Virginia's data center industry, which has spurred billions of dollars in investment. As previously reported, the measure saved companies between $1.6 billion and $1.9 billion in fiscal year 2025, and is expected to grow each year until its 2035 sunset date.
A report compiled by Virginia Tax from industry-reported data said that 31,502 direct and additional jobs were tied to data centers for the period between July 1, 2024 and June 30, 2025. At the same time, the power-hungry facilities pose new risks for the electrical grid, the costs of which are spread out to Virginians' utility bills.
The House and Senate still need to formally pass the budget, which must then be signed by Spanberger before July 1 to avoid a shutdown of the Virginia state government.
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