Clock ticking on Virginia budget as Democrats clash over data center tax break
With adjournment days away, lawmakers have yet to meet on a compromise spending plan amid a dispute over a costly incentive credited with fueling Northern Virginia’s tech boom
With just days remaining in the 2026 legislative session, Virginia lawmakers are running out of time to reach agreement on a new two-year state budget, even as Democrats control the governor’s office and both chambers of the General Assembly.
As of Wednesday afternoon, budget conferees had yet to meet to reconcile differences between the House and Senate spending plans, leaving a narrow window for negotiators to strike a deal before the legislature’s scheduled adjournment Saturday.
The House and Senate budget proposals both reshape the final two-year spending plan originally introduced by former Gov. Glenn Youngkin, which totaled roughly $212 billion across all funds for the upcoming biennium.
The biggest obstacle is a growing dispute over whether Virginia should phase out a lucrative tax exemption that has helped fuel the rapid growth of the state’s data-center industry.
Senate Democrats are pushing to end the retail sales and use tax exemption on computer equipment used in large data centers beginning Jan. 1, 2027 — a change they say would recapture billions in foregone revenue and fund public education, infrastructure and transportation investments.
But the House budget does not include the proposal, and Democratic Gov. Abigail Spanberger has signaled caution about altering a policy widely credited with helping Virginia become the world’s largest hub for data centers.
A central sticking point
When both chambers released their competing budget proposals last month, the Senate plan called for ending the exemption beginning in 2027.
Senate Finance and Appropriations Committee Chair Louise Lucas, D-Portsmouth, said the incentive — once expected to cost relatively little — has grown dramatically as the data-center industry expanded.
Originally projected to cost about $1.54 million annually, the exemption now results in roughly $1.6 billion in foregone tax revenue each year, according to Senate Democrats.
“In the most recent fiscal year alone, they benefited from more than $33.2 billion dollars in tax-free computer equipment purchases,” Lucas said when the Senate plan was unveiled, reiterating that data centers should “pay their fair share” to help the state deliver core its services of education, transportation, and social services.”
Lucas has argued the revenue could support transportation and water-infrastructure investments without increasing tolls or other fees.
Under the Senate proposal, ending the exemption would direct nearly $300 million to transportation projects across multiple modes.
The tax incentive has grown into one of Virginia’s largest economic-development programs, but analysts estimate it now costs the state about $1 billion annually in lost revenue.
While the policy helped make Northern Virginia the world’s largest data-center hub, critics say the industry’s rapid expansion strains energy infrastructure and generates relatively few jobs compared with its massive electricity and land demands.
House resistance and governor’s caution
The House budget does not include the Senate’s plan to eliminate the tax exemption, setting up a major conflict for negotiators.
House Appropriations Committee Chair Luke Torian, D-Prince William, told reporters Tuesday that budget conferees had not yet met to begin resolving the differences between the two plans.
The delay prompted a sharp response from Lucas, who took to social media to defend the Senate’s position.
“Let me be clear. There will not be a budget with Glenn Youngkin’s Data Center tax breaks in it. Glenn drove up YOUR utility bills to give tax breaks to data centers. Strong as battleship steel, I will fight for affordability for the people and encourage Gov. Spanberger to join me,” she wrote on X, formerly Twitter.
Asked about Lucas’ messaging at a Tuesday news conference, House Speaker Don Scott, D-Portsmouth, played down the clash and suggested the disagreement was part of the normal push and pull of budget talks.
“If she says whatever she says while we’re in this budget negotiation, it’s politics, and I think we’ll end up working it out,” he said.
Scott added that he believed House and Senate Democrats agreed on nearly everything else in the spending plan.
“I think we are more aligned on 99% issues, so I think we’ll be fine,” he said. “It always gets worked out.”
Speaking to reporters Wednesday afternoon after meeting with budget conferees, Spanberger echoed that sentiment and called the discussions “productive.”
“If you look at the side-by-side of the House budget and the Senate budget, they agree on so much, whether it’s the programs to fund and even in many cases the amount,” the governor said.
Concerning the debate over Virginia’s data center tax exemption, Spanberger said that “Data centers should pay their fair share, and I think the commonwealth of Virginia should also abide by contracts that we sign.”
Origins of the tax break
While Lucas blamed Youngkin for the tax breaks, Virginia’s data-center tax exemption dates back to 2009, when the General Assembly approved legislation sponsored by Sen. Creigh Deeds, D-Charlottesville, aimed at attracting high-tech investment during the Great Recession.
The law allows qualifying data centers to purchase computer equipment without paying Virginia’s retail sales and use tax, typically between about 5% and 7% depending on the locality.
To qualify, operators generally must invest at least $150 million and create at least 50 jobs that pay wages at least 150% of the local average.
The incentive applies to equipment used to process and store data — including servers, routers, networking hardware, cooling systems and related infrastructure.
The exemption took effect in 2010 after being signed by then-Gov. Tim Kaine and has since been extended multiple times as the industry expanded.
Under current law, the benefit can continue through 2035 and, in some cases, through 2050 for companies that meet higher investment and employment thresholds.
How the budget process works
Virginia’s two-year state budget is introduced by the governor in December before the General Assembly convenes. The proposal outlines revenue forecasts and spending priorities for the next biennium and serves as the starting point for lawmakers.
Once the session begins, the House Appropriations Committee and the Senate Finance and Appropriations Committee craft their own versions. After both chambers pass separate budgets, a conference committee negotiates a compromise behind closed doors and produces a conference report that must be approved by both chambers before being sent to the governor.
The immediate challenge is timing. House rules require the final budget to be available to lawmakers for 48 hours before a floor vote, meaning negotiators would need to reach an agreement by Thursday to adjourn on schedule Saturday.
If talks run longer — a common occurrence — conferees can continue negotiating after adjournment, but lawmakers typically stop receiving per diem payments unless they are called back into session. Once a deal is reached, the General Assembly must reconvene to vote on the conference report.
If negotiations extend past adjournment, the Virginia Constitution allows the governor to call lawmakers back to Richmond in a special session to finish the budget — a step governors often take when talks run long.
Virginia’s fiscal year begins July 1, giving negotiators additional time if needed, though leaders generally try to finish before adjournment. After passage, the budget goes to the governor, who can sign it, veto it or propose amendments that lawmakers consider during the General Assembly’s reconvened session, typically in April.
For now, legislative leaders are projecting confidence that negotiations will ultimately produce a deal, even as the deadline approaches.
Senate Democratic Caucus Chair Mamie Locke, D-Hampton, said during a news conference Tuesday that lawmakers were proceeding as they typically do during the final stretch of budget season.
“We are moving along as we normally do,” Locke said. “We will collaborate with each other, and we will work together, as Mr. Speaker indicated, as we sprint toward the deadline on Saturday. And we will get the work done.”
Virginia Mercury reporter Shannon Heckt contributed to this story.
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