Tax Break Fight May Reshape The Most Important Data Center Market

Virginia lawmakers are deadlocked over whether to end the state’s data center tax break. Their decision could have seismic implications for the world’s largest data center market.

More than 60 proposals about data centers were filed during Virginia's legislative session that ended Saturday, a barrage of bills indicative of the central role data centers now occupy in the commonwealth’s politics.

While five of those bills made it to the desk of Gov. Abigail Spanberger, there is an unresolved debate that could alter the course of the data center sector in the state: the unexpected elimination of a key tax break in the Senate’s proposed budget.

Virginia pioneered the strategy of sales and use tax exemptions to promote data center development, and the tax breaks are often credited with turning the state into the data center industry’s global epicenter. It allows firms to avoid a 5.3% tax on the value of the information technology gear and other critical equipment housed inside data centers, a benefit that can be worth hundreds of millions of dollars for a single facility. 

Now, Virginia’s House of Delegates and Senate, both controlled by Democrats, are at an impasse over the fate of these tax breaks.

The spending bill passed by the House and supported by Spanberger would keep the tax incentives in place, albeit with provisions requiring that facilities meet certain efficiency and environmental standards. But the Senate’s budget bill eliminates the tax breaks outright in 2027, well ahead of the scheduled 2035 sunset date.

Fierce disagreement between the two chambers over the fate of the tax exemption prevented the passage of a budget before the end of the legislative term. This led Spanberger to call for a special legislative session on April 23, at which lawmakers must pass a spending plan to avoid a shutdown. 

This special session could have vast implications for the future of the data center industry in its traditional heartland.

Similar tax exemptions are now available in more than 35 states, and they are broadly considered a prerequisite for large-scale data center development. Should Virginia eliminate these tax breaks, industry groups — as well as some of the measure’s proponents — say it would dramatically slow the pace of data center development in the state. 

“This proposal, if enacted, would do significant damage to one of the Commonwealth’s most economically impactful industries and send an exceptionally negative message to other businesses across industries that are considering investment, relocation, or expansion in the Commonwealth of Virginia,” according to a letter to lawmakers signed by 53 business and economic development groups in the state.

“During a time of economic challenge and uncertainty, it would be unwise to close our doors to an industry that is investing, hiring, growing, and delivering economic benefits in communities across Virginia.”

The letter, echoed by others in the data center sector and by House leaders, says that ending the incentives will push the industry elsewhere. It cites a finding in a state-sponsored study that at least 90% of the data center investment in Virginia wouldn't have occurred if not for the tax exemption program. 

But for some proponents of the bill, pushing development elsewhere is the objective in a region where new data center proposals are increasingly fueling organized opposition and causing friction between communities and developers.

Lawmakers like Senate President Pro Tempore Louise Lucas have framed the tax breaks as a handout for the world’s most valuable companies that strips $1.6B from the commonwealth’s coffers annually and whose repeal is necessary to fund the state budget.

Lucas said the threat of the industry abandoning the state if the incentives end is nothing more than a scare tactic from developers and tech giants thinking about their bottom line.

“I don’t think it does anything to the industry,” Lucas told the Virginia Mercury. “A lot of folks are saying they are going to be leaving and going to other places. I don’t believe that’s going to happen. I think they will continue to build in Virginia, but I think they understand it will be a different playing field now.”

Lucas, who represents communities in the southeastern part of the state, became well known in the D.C. region in 2024 when she killed the plan to move Washington's NBA and NHL teams from the city to a proposed arena complex in Northern Virginia. 

While the upcoming budget decision could mark an inflection point for the data center industry in the state, five data center-focused bills have already passed both legislative chambers and await their fate on the governor’s desk. 

Among them is Senate Bill 253, introduced by Lucas, which gives state officials more authority to make data centers pay a higher share of Dominion Energy’s infrastructure costs to avoid raising rates for consumers. 

Senate Bill 94, meanwhile, mandates that any data center project larger than 100 megawatts asking for rezoning submit reports to local officials detailing the project’s potential impact on agriculture, parks, historic sites and forest land. Other bills would require water utilities to report quarterly on how much water is used by data centers, create a working group to study how to reuse waste heat from data centers, and prohibit the installation of backup generators that don’t meet certain emissions and efficiency standards. 

While Spanberger has established a position against eliminating data center tax breaks, it remains unclear whether the first-term governor will sign these bills into law. 

Former Gov. Glenn Youngkin, a Republican and proponent of data center development, rejected legislation passed by the commonwealth’s General Assembly last year that would have required data center developers to perform site studies and disclose a range of environmental impacts.