Neither budget proposal would raise general taxes, but the Senate Finance & Appropriations Committee introduced a budget on Sunday that would repeal the sales tax exemption on data center computer servers and other equipment that the industry regularly replaces. Last year alone, the tax exemption saved the industry $1.9 billion, but the Senate budget uses a three-year average to estimate $1.1 billion in additional sales tax revenue for state and local government in the two-year budget by repealing the exemption, effective on Jan. 1, 2027.
Senate Finance Chair Louise Lucas, D-Portsmouth, said the Senate's approach will return tax savings from data centers to Virginia taxpayers and won't hurt the fast-growing industry.
"I think they will continue to build in Virginia, but I think they understand it's going to be a different playing field now," she told reporters after the committee meeting on Sunday, adding that her position is "firm as concrete."
The Senate budget proposes to use the additional state sales tax revenues to provide tax rebates of $100 for each individual taxpayer and $200 for each couple filing jointly; boost the standard deduction for taxpayers who don't itemize their tax deductions; and give a 3% raise in each year of the two-year budget to state employees, teachers and state-supported local employees instead of the 2% raises that then-Gov. Glenn Youngkin included in his parting budget proposal in December. The House budget would maintain raises of 2% each year.
Lucas said the proposed budget advances Gov. Abigail Spanberger's "affordability" agenda, which she called the "entire mantra" of the Democratic-controlled General Assembly in the legislative session that began last month.
"By exempting more income from taxation, Virginians get increased relief in their paychecks," she said in her opening statement on Sunday. "That's affordability."
However, money for additional tax cuts, employee raises, and other spending priorities would come at the expense of the data center industry, which has made Virginia its global center over the past 15 years under the state tax exemption, while generating $5.3 billion in tax revenues in the past two years, primarily for local governments in Northern Virginia.
Nicole Riley, director of Virginia government affairs for the Data Center Coalition, said the Senate proposal "will effectively halt investment by an industry that has invested more than $100 billion across the Commonwealth in just the last three years. The data center industry supports tens of thousands of jobs around the state and generated more than $5 billion in state and local tax revenue in the last two years."
"At a time when Virginia’s economy is facing significant challenges, this would be a self-inflicted hit to our economy that will cost Virginia billions in economic impact and tax revenue, and jeopardize tens of thousands of jobs,” Riley said.
Union officials also denounced the threatened loss of the state tax exemption for the data center industry.
"If these punitive and ill-advised budget items become law, they will put thousands of Virginians out of work and send tens of billions of dollars of investment to other states," said Chris Cash and Charles Skelly, business managers for the International Brotherhood of Electrical Workers union locals in Northern and Central Virginia, respectively.
The House Appropriations Committee didn't touch the data center tax exemption in its budget proposal, but instead placed conditions on it to reduce pollution and require greater use of clean energy sources, consistent with legislation the House passed last week.
"We put some guardrails on data centers but didn't take the money," said House Appropriations Chairman Luke Torian, D-Prince William. "That's going to lead to some robust conversations."
Lucas defended the Senate's approach as best for Virginians, who, she said, are "increasingly concerned about subsidizing (data center) energy demand and mitigating their environmental impacts."
"We're asking data centers to pay their fair share of the sales tax to help deliver our core services," she said in her opening statement.
Republicans have been warning since the assembly session began that the Democratic legislature and governor were preparing to raise taxes and impose a multitude of fees on Virginians, but most of those proposals didn't survive this year.
"I can't tell you how much I appreciate that there are no tax increases in this budget," Sen. Richard Stuart, R-King George, told Lucas at the end of the meeting.
Senate Minority Leader Ryan McDougle, R-Hanover, was more guarded in his reaction, noting that the Senate budget would block the state from adopting almost $1 billion in tax cuts in the massive budget reconciliation package that President Donald Trump signed on July 4, including proposed tax exemptions for income from tips and overtime pay. He also noted that the budget would rely on more than $98 million from a proposed tax on firearms and ammunition that is rolling through both chambers.
McDougle was one of three Republicans to abstain in the 11-0 vote to adopt the proposed budget because he said it would generate "a significant amount of income up and above" the budget that Youngkin, a Republican, had introduced.
"I think we need to have a serious conversation about where those revenues come from and how they impact Virginians," he said.
The House Appropriations budget focused primarily on defending Virginia against federal cuts under Trump's tax cut package to food assistance for low-income households, health care under Medicaid and lapsed federal subsidies for health care premiums under the Affordable Care Act.
"Over the past year, federal actions have created real gaps — gaps in health care funding, in workforce programs, in education support, and in the safety nets that families rely on," Torian said in his opening statement at the committee meeting on Sunday. "Virginians should not be collateral damage of decisions made in Washington. This budget backfills those holes, not out of politics, but out of prudence."
"This budget before us today reflects a simple but serious responsibility: when forces beyond Virginia's control create uncertainty or instability, this body must step up to protect our people and our economy," he said.
The proposed House budget would also use almost $1 billion in savings by not adopting provisions of Trump's tax package, including exemptions on income from tips and overtime, as well as almost $268 million in new revenue from pending legislation to regulate and tax electronic skill games and fantasy sports betting.
It also anticipates about $36 million from the proposed sale of the state's James Monroe Building and the vacant site of the former Virginia Employment Commission headquarters in downtown Richmond. Both budgets also proposed to spend $33 million to demolish the Virginia Department of Transportation Annex at 1401 E. Broad St., where the state plans to construct a new office building to house some of the agencies displaced from the Monroe Building.
Both budgets also proposed substantial new funding for K-12 public schools, including allowing all localities to impose a 1% sales tax, with voter approval, to help pay for school construction and modernization. The House budget also included $400 million in one-time funding to distribute among local school divisions that agree to match the 2% raises that Youngkin and the House approved for teachers and other school staff under the Standards of Quality.
Both budgets also provide additional money for public colleges and universities to boost financial aid and moderate tuition increases, which Youngkin's budget did not address.
The House and Senate propose to compensate for the cuts under both Trump's tax package and Youngkin's parting budget, which didn't include money to make up for up to $270 million in costs for the Supplemental Nutrition Assistance Program, as well as money for the increased administration costs for local social services departments. The committee budgets take different approaches, with the House proposing to spend $211 million to pay for food benefits, while the Senate set aside $135 million and pushed to lower the state's cost by reducing the so-called "error rate" in the determination of eligibility for the program.
The House budget would provide additional money to make up less federal money for administering SNAP at both the state and local levels, while the Senate plan would backfill only the loss of state administrative funds.
The House and Senate budgets also propose to partly make up for the loss of enhanced federal health premium subsidies — pending potential U.S. Senate action to restore them. The state Senate provided $200 million to make premiums more affordable, while the House set aside $79 million.
Both budgets would restore some, but not most of the more than $600 million in cuts to Medicaid that Youngkin made in his budget to reduce $3.2 billion in increased costs for the state health care program for elderly, disabled and low-income Virginians. Among the cuts that the committee budgets would reverse is money for the HIV medications and services under the Ryan White Act that the Trump administration cut from federal funding for the state health department.
"Gov. Youngkin's outgoing budget had significant structural deficiencies and refused to plan for the increased costs to Virginians from federal actions" in Trump's tax package, Lucas said.
The proposed budgets will come before the full House and Senate on Thursday for approval, and then budget negotiators will work to resolve their differences before the assembly is scheduled to adjourn on March 14.
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