2026 Virginia State Budget: Centered on Data Centers

The Regular Session of the 2026 Virginia General Assembly adjourned on March 14, 2026, but legislative debate continued through the succeeding three months, as the legislature adjourned without a biennial budget. While the House and Senate budget proposals differed in various areas, the central point of contention was Virginia’s data center sales and use tax exemption (DCSUTE).

History of the Tax Exemption

Created in the wake of the 2008 financial crisis, the DCSUTE was intended as a tool to attract the industry to economically-distressed localities in Virginia - specifically those with an unemployment rate above 4.9%. To qualify, a data center was to commit an investment of $75 million in exempt property and create at least 100 new jobs paying at least twice the prevailing wage in the locality. In 2010, the program was expanded to the entire Commonwealth, with reduced investment thresholds and employment requirements. Further refinements through 2016 added a 2035 sunset date, and 2023 amendments introduced extended sunsets – 2040 for $35 billion/1,000-job commitments, and 2050 for $100 billion/2,500-job commitments. Currently, qualification requires a memorandum of understanding that commits $150 million in capital investments and creates 50 jobs.

Data Centers in Virginia

Data centers are major economic drivers, but also a growing point of controversy in the Commonwealth. According to the Joint Legislative Audit & Review Commission’s (JLARC) 2023 data center study, “[l]ocalities with data centers can collect substantial tax revenues from the industry, primarily from business personal property and real property taxes… For the five localities with relatively mature data center markets, data center revenue ranged from less than 1 percent to 31 percent of total local revenue.” Further, JLARC states that, “the data center industry is estimated to contribute 74,000 jobs, $5.5 billion in labor income, and $9.1 billion in GDP to Virginia’s economy annually.” 1

Critics counter that the industry's round-the-clock power demands strain the grid and require costly new infrastructure, with those costs passed to less-demanding ratepayers. Nearby residents also raise concerns about noise, water use, and light pollution – fueling public frustration despite the clear economic upside.

The Compromise

After months of contentious conference negotiations, a compromise emerged: a first-of-its-kind energy consumption tax, originally proposed by Governor Spanberger. As of July 1, 2026, data centers are taxed at $0.011 per kWh, with rebates available for on-site, off-grid energy generation. Revenue from the tax is capped at $600 million per year – $1.2 billion over the biennium – about $700 million less than the $1.9 billion a full exemption repeal was projected to generate. Any collections above the $600 million cap will be refunded to operators on a pro rata basis. While this compromise shows promise, it’s unlikely that it resolves the issue permanently.

The Current Paradox

Virginia now reckons with a difficult cost-benefit analysis: do we uphold our commitments and continue to foster the industry, or do we capture significant foregone revenue and risk damaging Virginia’s pro-business reputation?

Members of the House of Delegates and the Governor’s Administration believe that repealing the exemption is a signal of bad business to potential investors and could drive new investments away from the Commonwealth. They also state that the associated economic stimulus is critical for Commonwealth localities.

Members of the Senate – irrespective of the conference negotiation compromise – maintain that data centers need to “pay their fair share”, with some members already signaling plans to pursue related legislation next session.

Looking Ahead

According to JLARC, Virginia is now the world's largest data center market by operational capacity and continues expanding rapidly.2 Given the magnitude and growth of the industry – and the "Data Center Capital" title that comes with it – this legislative ceasefire is temporary. As Larry David once said, “A good compromise is when both parties are dissatisfied, and I think that’s what we have here.”

[1] Joint Legislative Audit & Review Commission, “Data Centers in Virginia”, 2023, pg. i-ii

[2] Joint Legislative Audit & Review Commission, “Data Centers in Virginia”, 2023, pg. 7-8