Senate budget proposal keeps data center sales tax exemption, adds new tax for industry

On Tuesday, the Virginia Senate released its latest budget proposal that preserves a sales and use tax exemption for the data center industry, the major hangup that has gummed up negotiations between both legislative chambers. The revamped proposal also adds a tiered tax for the industry that targets diesel generators and would generate $1.8 billion for the state, Senate leaders said.

Sen. L. Louise Lucas, D-Portsmouth, speaks during a Chesterfield stop on her statewide listening tour about data centers. (Photo by Shannon Heckt/Virginia Mercury)

Sen. Louise Lucas, D-Portsmouth, has advocated to axe the exemption for months, but amid stalled negotiations that risk a government shutdown if a budget isn’t finalized by June 30, the new proposal from her chamber signals a willingness to compromise, with a sustained goal of regaining money the state misses out on due to the exemption.

“We know technology is not bad. You know, we all can benefit from technology, but we, as a government, have not done a good job in managing the regulations and the impact on our communities, and that’s what we’ve got to rein in,” Lucas said Tuesday night at a middle school in Chesterfield at a stop on her data center listening tour.

The new Senate spending plan would levy a tiered impact tax on the types of backup generators that data centers use. The diesel generators have been a point of contention for residents who live near data centers due to heightened concerns over the air pollution released from the generators.

The older, Tier 1 and 2 model backup generators release the most pollution. A new state law requires all new data centers that apply for an air permit to use Tier 4 models, which, along with Tier 3 models, are cleaner.

The Senate’s proposed data center tax would be distributed this way:

– $45.00 per permitted kilowatt electrical (kWe) on any Tier 1 and Tier 2 generator;

– $37.00 per permitted kWe on any Tier 2 backup generator retrofitted to be a Tier 4-

equivalent backup generator, Tier 3 generators, and any generator powered by natural gas

– $35.00 per permitted kWe on any Tier 4 generator or any other generator.

Each quarter, data centers would remit the fees to the Department of Taxation and deposited to the general fund.

The key term is “permitted.” Data centers rarely run their backup generators unless there is an emergency power outage or for short periods for monthly testing. But they are permitted for vastly larger amounts than their actual use, which would mean more tax revenue under this plan.

According to Senate finance committee officials, the new generator tax would bring in an estimated $1.8 billion over the biennium. This would be about half of what the state could make in tax revenue if the sales and use tax exemption for the industry were revoked.

The Senate plan, similar to the House, would create a workgroup to generate policy recommendations on how to phase out the sales tax exemption for the industry and present a report to the General Assembly in the fall.

When asked how this group’s report would differ from past reports, such as the 2024 JLARC study on data centers, Lucas said it won’t reveal more than what the state already knows about the impact of data centers across the commonwealth.

“I don’t expect that there’s going to be anything new coming out of it. I actually think it’s a waste of time. But since they want to do it, we will accommodate them,” Lucas said Tuesday.

Lucas said that the House and Senate conferees planned to meet late into the night on Tuesday to work out a deal.

House Speaker Don Scott, D-Portsmouth, canceled the chamber’s special session on the budget that had been scheduled for Thursday in Richmond, since a deal with the Senate has not been finalized.

Lucas said that the goal for budget conferees of both bodies is to have a deal in place before the Senate is slated to return to the Capitol on Monday.

by Shannon Heckt, Virginia Mercury

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