Virginia’s data-center industry has boomed under tax breaks first offered nearly two decades ago, and senators are now weighing whether that deal should end. On March 11, the state’s upper chamber voted to repeal what supporters described as a major incentive—an action that would shift data centers back toward paying sales tax rather than operating under the prior exemption.
The proposal would end a projected $1.6 billion annual tax break for the industry and would require companies to resume paying a minimum 5.3% sales tax, according to the terms described by backers and opponents in the legislative debate. The measure was already reshaping conversations between lawmakers as they approached a budget deadline, with House action not yet assured.
The vote also surfaced internal tensions among Democrats, with the legislative schedule and the state budget timetable heightening the political stakes. While the Senate moved forward with the change, the proposal’s outcome in the House remained uncertain as lawmakers tried to reconcile budget priorities with the question of how much revenue to raise from the data-center industry.
Gov. Abigail Spanberger’s office said it was wary of “going back on Virginia’s commitments to businesses that have invested in the Commonwealth.” Democratic Sen. L. Louise Lucas, who chairs the finance committee and supports the tax proposal, responded on X that the governor’s concern missed the point of what legislators were trying to do with the money, writing that “Gov. Spanberger thinks our chicken isn’t cooked — then what is the Senate supposed to pluck out of our budget?”
Lucas argued the tax proposal is tied to spending priorities that lawmakers could address if the industry’s tax break ended. In Senate debate, the fight was also portrayed as part of a wider national pushback on data centers as artificial intelligence drives more demand for power and as communities grapple with the scale of construction, including server-housing campuses and associated infrastructure.
The proposal’s supporters said it reflected a shift from local opposition centered on noise and construction impacts to broader concerns about costs and electricity use. In Virginia, Republican state Sen. Mark Obenshain said lawmakers had moved “from the ‘NIMBY’ phase: Not In My Backyard,” into what he described as “the ‘banana’ phase: Build Absolutely Nothing Anywhere Near Anything,” framing the political moment as one where community pressure is expanding.
Backers also pointed to the industry’s growth and the impact of tax incentives on it. The AP reported that nearly 18 years after Virginia began offering tax breaks on equipment and software, the state had become a major data hub and that, during the most recent two years, the state tax department said the industry had invested more than $80 billion and created thousands of jobs.
Opponents warned that reversing the incentive could slow further development. The Data Center Coalition said the tax would “effectively halt investment” from the industry, and the AP noted that this month Amazon Data Services bought land from George Washington University in northern Virginia for a data center—an example cited by officials to illustrate continued expansion.
In the Senate, the measure to end the tax break won bipartisan support, with 21 Democrats and seven Republicans voting for it, the AP reported. Republican Sen. Richard Stuart said he did not think the repeal would curb the industry’s momentum, saying, “This ain’t going to slow this train down one iota.”
Other states have already moved in similar directions by tightening or rethinking tax incentives for data centers, ranging from electricity-related changes to pauses and conditions tied to new projects. The AP said Minnesota removed a sales tax exemption on electricity purchases by the largest data centers and added fees and regulations; Washington state lawmakers were advancing a bill that would eliminate the break for existing centers when they replace or upgrade equipment; and Illinois Gov. J.B. Pritzker called for a two-year “pause” on data center tax breaks while Arizona Gov. Katie Hobbs proposed eliminating the state’s sales tax exemption entirely.
Virginia senators still faced opposition as debate continued, including from labor and industry-aligned advocates. The AP said the International Brotherhood of Electrical Workers lobbied at the statehouse urging lawmakers to protect data centers, and that electrical worker Dorian Hargrave said, in a statement, “We need this industry. If we lose it, our economy is going to take a very big hit.”