Virginia Senate Votes to Kill $1.6 Billion Annual Data Center Tax Break

Virginia's two-decade experiment with lavish data center tax incentives is headed for an abrupt end, as the state Senate voted to strip the industry of a $1.6 billion annual exemption and require it to resume paying a minimum 5.3% sales tax on equipment and software.

The bipartisan vote, 21 Democrats and seven Republicans, reflects a hardening political consensus that the benefits of subsidizing data center expansion no longer justify the fiscal and energy costs. The tax break, created in 2008, allowed developers to spend money tax-free on servers, routers, HVAC equipment and, in many cases, the materials to build the facilities themselves. When Virginia's Department of Taxation projected the annual cost of that carve-out nearly two decades ago, its estimate was $1.54 million. The exemption ultimately cost the Commonwealth $1.6 billion in forgone revenue in fiscal year 2025 alone, a figure that exceeds the original projection by more than 100,000 percent.

Sen. Richard Stuart, a Republican who voted with the majority, dismissed warnings that the repeal would drive investment away. "This ain't going to slow this train down one iota," he said.

Those warnings have been loud. Opponents argue that eliminating the break could bring new construction to a screeching halt in a state that became one of the world's preeminent data center hubs precisely because of the incentives. The International Brotherhood of Electrical Workers lobbied at the statehouse, urging lawmakers to protect the industry and the union jobs it supports.

The Senate's proposal sits at the center of a $212 billion state budget battle. The chamber wants to accelerate the exemption's sunset from 2035 to January 1, 2027. House Democrats are pushing in the opposite direction, backing a budget that preserves the tax break through 2035 while attaching new clean energy requirements to it. A closed-door conference committee must reconcile the two positions before the legislative session ends.

The fight plays out against a backdrop of surging AI-driven electricity demand that has overwhelmed power grids and ignited public anger over data centers' resource consumption. Virginia, with its dense concentration of facilities, has become a focal point for residents who complain about noise, rising utility costs and the strain on the grid.

That frustration is no longer confined to the state. Illinois Gov. JB Pritzker has called for a two-year pause on data center tax breaks, citing rising household electric bills. Arizona Gov. Katie Hobbs has gone further, calling her state's exemption a "corporate handout" and pushing to eliminate it entirely. Lawmakers in Arizona, Michigan and Georgia have introduced repeal bills this year. Georgia's legislature passed a two-year pause in 2024, though Gov. Brian Kemp vetoed it. Minnesota has already removed the sales tax exemption on electricity purchases by the largest data centers, imposed a fee for electricity use and toughened regulations on water consumption. Washington state is advancing legislation that would preserve the break for new facilities but eliminate it for existing centers that upgrade equipment, a change projected to recover $83 million in the first year.

Tech companies have proven skilled at protecting these breaks in statehouses across the country, and the outcome in Virginia remains uncertain. The conference committee's decision will determine whether the nation's most consequential data center market finally starts paying its way.