Virginia Lawmakers Recess Special Session Without a Budget Deal

The Virginia General Assembly convened for a special session on Thursday to finalize the state’s $212 billion budget, but recessed after just a few hours without a deal, underscoring deep divisions within the Democratic majorities and leaving the spending plan unresolved.

After a brief floor session, lawmakers left Richmond and returned to their districts, with no clear timeline for when negotiations might produce a compromise on the two-year spending plan.

At the center of the impasse is a dispute within the Democratic majority over whether to scale back a lucrative tax incentive that has helped fuel Virginia’s rise as the world’s largest data center hub.

Data center tax fight stalls progress

The Senate’s proposal would phase out the retail sales and use tax exemption on data-center equipment beginning Jan. 1, 2027 — a move supporters say could reclaim billions in foregone revenue and redirect it toward schools, transportation, and infrastructure.

But the House budget omits the change, and Democratic Gov. Abigail Spanberger has urged caution, signaling the state should be careful about altering incentives companies relied on when making major investments.

The divide has stalled negotiations for weeks, leading the General Assembly to adjourn its regular session without passing a budget despite unified party control.

“There’s no white smoke,” Senate Finance and Appropriations Chair Louise Lucas, D-Portsmouth, said Wednesday, invoking the Vatican’s signal for selecting a pope, when asked about progress.

Lucas has pushed to end the exemption, arguing that a program once expected to cost about $1.54 million annually has grown dramatically alongside the industry. Senate Democrats now estimate the policy results in roughly $1.6 billion in foregone tax revenue each year.

“In the most recent fiscal year alone, they benefited from more than $33.2 billion dollars in tax-free computer equipment purchases,” Lucas said when the Senate plan was unveiled in February, adding that data centers should “pay their fair share” to help fund education, transportation and social services.

Under the Senate proposal, nearly $300 million in revenue alone would be directed to transportation projects across multiple modes.

Expansion of industry reshapes tax debate

The House has not adopted that approach, setting up a central conflict for negotiators.

Under current law, qualifying data centers — generally those investing at least $150 million and creating at least 50 jobs paying well above local averages — can purchase equipment such as servers, routers and cooling systems without paying Virginia’s sales and use tax. The exemption, which first went into effect in 2010, and sunsets in 2035, extending it until 2050 if certain conditions are met.

Critics say the industry’s rapid expansion strains energy and water resources while generating relatively few jobs, but others argue the incentive has been key to Virginia’s economic growth and global competitiveness.

House Appropriations Chair Luke Torian, D-Prince William, said Thursday that talks have yet to meaningfully advance.

“We’re ready, we’re just waiting to have some conversations with the Senate,” Torian said in a brief interview. “These things work themselves out once we get to have a conversation.”

He added that the data center dispute is compounded by an unexpected shortfall of about $250 million following Spanberger’s veto of legislation that would have legalized and taxed skill games.

“All needs to be resolved,” Torian said, without offering a timeline for when a deal might come together.

In recent weeks, lawmakers have discussed potential compromises with industry representatives, including an energy consumption tax for high-demand users or narrowing what equipment qualifies for the exemption, but no agreement has been reached.

The data center industry has signaled it remains willing to negotiate, even as talks stall.

“The industry offered legislative leaders two proposals that would help achieve this, the most recent of which would provide $1.1 billion of new state revenue over the biennium and hundreds of millions in recurring revenue in the out years,” said Josh Levi, president of the Data Center Coalition.

“These proposals were rejected. The industry has yet to receive any substantive feedback or details about what a resolution might include.”

Lawmakers, however, have emphasized that any compromise must still address broader concerns about the industry’s impact on state resources.

“We want data centers here, we want more businesses here,” said Sen. Lamont Bagby on the Senate floor. “But they need to pay their fair share. We need to protect our water and protect our energy … but be fair about it.”

Republicans have largely aligned with the governor’s position. House Minority Leader Terry Kilgore, R-Scott, said the state should honor its commitments.

“We made promises to these data centers when they came here that ‘you’d have this tax credit,’ and we as Virginians need to fulfill our promises,” Kilgore said.

Skill games veto creates new budget hole

Kilgore said negotiations remain slow and stressed the urgency of reaching a deal before the fiscal deadline.

“There’s not been a lot of progress on the budget yet; the Senate and House are far apart,” he said. “We only have until June 30, and unlike in the federal government, a lot of things start shutting down here in the commonwealth.”

He said resolving the data center tax issue is key to determining available revenue.

“We have to have the revenues correct and what’s coming in before we can move forward because in Virginia, we require a balanced budget.”

Del. Terry Austin of Botetourt, the ranking Republican on the House Appropriations Committee, said he has seen little progress since lawmakers adjourned in March.

“I’m not privy to that information since we have not met,” Austin said, referring to the data center tax breaks negotiations.

“But when we left in March, that was the primary issue. Of course, now, we don’t have the skill games money either for our budget, so that’s got to be addressed also. I’m not sure of anything right now, but we’ll get there eventually, we always do.”

Spanberger’s veto of the skill games bill last week added a new complication to negotiations — and caught some lawmakers off guard.

In explaining her decision, the governor cited concerns about the lack of a centralized regulatory authority for gaming and pointed to data from the Virginia Alcoholic Beverage Control Authority showing that skill machines had been concentrated in lower-income communities during a period when they were previously legal.

“The absence of a centralized regulatory authority for gaming creates gaps in oversight that threaten the Commonwealth of Virginia’s ability to provide consistent enforcement, prevent illicit activity, and protect all consumers,” Spanberger said in a statement last week.

She added that legalizing the machines now “would also reward operators who knowingly disregarded state law for years and set a troubling precedent for how business is conducted in Virginia.”

Health care and timeline add urgency

The budget stalemate is also raising concerns about broader impacts, particularly health care, which makes up a significant share of state spending.

Del. Rodney Willett, D-Henrico, who chairs the House Health and Human Services Committee, said delays in finalizing the budget could complicate funding for programs affecting millions of Virginians.

“It’s a system,” Willett said. “You affect one part of the system — in this case it’s several parts — but it affects the whole thing.”

More than 2 million Virginians rely on state social services such as Medicaid and the Supplemental Nutrition Assistance Program, while about 400,000 obtain insurance through the state’s marketplace.

Since Congress passed a reconciliation bill last year, state agencies have faced additional demands to verify eligibility for benefits. Virginia lawmakers have proposed investing hundreds of millions of dollars to support that work and prevent eligible residents from losing coverage.

At the same time, the expiration of federal Affordable Care Act subsidies has led 33,000 Virginians to drop coverage as premiums rise.

The House and Senate have proposed competing plans to address the issue, with the House suggesting $79.1 million next year and the Senate proposing up to $200 million beginning this year.

Kilgore said Republicans are wary of taking on those costs at the state level.

“I’m not sure we should,” he said, adding that the issue is still being evaluated.

An estimated 100,000 Virginians who receive insurance through the marketplace are considered particularly vulnerable to premium increases, raising concerns that more residents could lose coverage if the state doesn’t take action.

Willett warned that failing to address coverage gaps could increase strain on hospitals and clinics, as uninsured patients delay care and turn to emergency services.

His proposal includes a $5 million increase for free clinics aimed at reducing long-term costs by expanding access to preventive care and keeping patients out of emergency rooms.

Hospitals across Virginia have already begun scaling back services or closing facilities in part due to financial pressures tied to federal policy changes, adding another layer of urgency to the state budget talks.

I’m confident in the conferees that we’re going to get a budget that reflects the fact that we’ve got to take care of people in Virginia,” Willett said.

How the budget process works

Virginia’s budget process begins with the governor’s proposal in December, followed by separate House and Senate versions during the legislative session. Differences are resolved in a conference committee, whose compromise must be approved by both chambers before being sent back to the governor.

House rules require the final budget to be available for 48 hours before a vote. If negotiations extend beyond adjournment, lawmakers can continue talks and reconvene once an agreement is reached. The governor may also call a special session if needed, which Spanberger did in March.

With the fiscal year set to begin July 1, lawmakers face a narrowing window to strike a deal.

by Markus Schmidt, Shannon Heckt, and Charlotte Rene Woods, Virginia Mercury

Virginia Mercury is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Virginia Mercury maintains editorial independence. Contact Editor Samantha Willis for questions: info@virginiamercury.com.