Here’s What House Lawmakers Want to Require of Data Centers to Keep Their Sales Tax Break

As lawmakers work behind closed doors to finalize the state’s $212 billion budget before the next fiscal year begins in July, negotiations hinge on whether the data center industry’s sales and use tax exemption should end or continue with new requirements.

The Senate version of the budget — arguably the most controversial part of either plan — completely eliminates the 5.6% tax exemption in an attempt to recoup the average annual loss of $1.6 billion in state revenue.

Virginia lawmakers recess special session without a budget deal

Lawmakers, including Senate Bill 30 sponsor Sen. Louise Lucas, D-Portsmouth, plan to use the reclaimed money for priority transportation, education, and local initiatives.

The House budget allows the exemption to continue, but enacts new environmental standards that data centers must meet to qualify for the tax break.

According to the proposed House spending plan, data center operators would be barred from co-locating with power facilities that generate carbon emissions in order to get the tax credit, starting in July 2027.

The tax exemption would be predicated, under the new requirements of the House plan, on data centers purchasing renewable energy certificates that help meet energy demand, and using generators that don’t release carbon emissions.

The facilities would also have to pledge to be as energy efficient as possible to cut down on their power use.

Under current law, the tax incentive lasts through 2035, and data center operators must invest at least $150 million and create 50 new jobs locally to qualify. If the locality where the digital facility is sited is considered “distressed,” the required commitment shrinks to $70 million and 10 new jobs.

The new jobs data centers create must be “associated with the operation or maintenance of the data center,” and, salary-wise, must pay workers at least one and one-half times the locality’s prevailing average wage.

According to the 2024 Joint Legislative Audit and Review Commission report on the data center industry, construction roles make up the majority of jobs created by data centers in Virginia.

Of the estimated 50 jobs per data center, about half are contract workers. Electrical unions — whose members say they’ve dramatically increased their wages by helping to build data centers — are major supporters of the House plan.

House Speaker Don Scott has been a major proponent of his chamber’s plan, while Gov. Abigail Spanberger has repeatedly stated she believes that the state should honor its commitments to the industry that already is benefiting from the tax exemption. She has also welcomed other methods of ensuring the industry is “paying its fair share.”

The environmental requirements were taken, in part, from House Bill 897. By Del. Rip Sullivan, D-Fairfax, and SB 465, by Sen. Ceigh Deeds, D-Charlottesville. Sullivan said he and his colleagues see the legislation as a win for clean air and water and a means to sustain data centers’ tax break — and possibly their presence in the state.

“It preserves the tax exemption while creating an incentive for the industry to become part of the solution to the challenges its growth in Virginia has caused for our communities and our grid,” Sullivan said. “Since an earlier version was included in the House budget, it, or at least its concepts, could still be part of the ongoing discussion to find a path forward.”

Damian Pitt, a professor at Virginia Commonwealth University who researches state and local climate policy, said attaching the environmental requirements to the tax credits can help ensure communities’ mounting concerns about data centers are directly addressed by the industry.

“I think a more robust and a more comprehensive regulatory or market-based solution is what’s needed,” Pitt said.

Several ideas have been pitched in the ongoing debate. One is an energy consumption tax, which would levy a tax on the amount of power facilities used.

As both sides work towards a solution, the data center industry has offered to invest up to $1 billion over the biennium, but the method of that investment wasn’t released publicly. Data center representatives said after the recess of the special session on Thursday that lawmakers rejected this proposal. 

Pitt is skeptical that the Senate plan to start taxing the facilities will directly improve environmental challenges that communities statewide have pushed back against, nor would it necessarily move data centers to act on them.

“Simply, a tax is not necessarily going to inspire better environmental performance. That depends on how high the tax is and what that means for the bottom lines of these data center operators,” Pitt said.

He continued: “If that tax revenue is directed towards, in some way, offsetting the environmental impacts of these data centers, that would be ideal, but I don’t know if that’s necessarily even what the intention would be with that revenue.”

Lawmakers failed to come to terms and release a shared budget during last week’s special session. The reconciliation of the dueling budgets, which will spell the fate of the tax break, remains the key goal of legislators’ continued private negotiations.

Once they reach a deal, lawmakers will be called back to Richmond to vote on the budget as a whole; it must be done before July 1, or the state government will effectively shut down, and funding to agencies could be disrupted.

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