Virginia Democrats Cannot Agree on a $1.6 Billion Data Center Tax Exemption. A Special Session on April 23 Will Decide It.

Virginia’s data center sales tax exemption cost the state $1.6 billion in forgone revenue in FY2025, a 118 percent increase from the prior year, according to a January 2026 state report. The state’s legislature ended its regular session on March 14, 2026 without passing a budget, the first time that has happened in recent memory, because the Senate and House cannot agree on what to do with that exemption. Governor Abigail Spanberger called a special session for April 23. As of April 9, Democrats controlling the House, Senate, and Governor’s office have not produced an agreement.

What the Exemption Does

Virginia’s Data Center Retail Sales and Use Tax Exemption was established in 2008. It exempts qualifying computer equipment and enabling software from Virginia’s state and local sales and use taxes for data center operators that invest at least $150 million and create at least 50 jobs at wages 150 percent above the local average. Qualifying equipment covers servers, networking hardware, power systems including generators, substations and batteries, cooling systems, and cabling. The exemption runs through June 30, 2035 under current law.

In FY2025, $33.2 billion of equipment purchases were covered by the exemption. A JLARC analysis found data centers received $2.73 billion in total exemptions between FY2021 and FY2024. In FY2024, the exemption accounted for 79 percent of all Virginia economic incentive spending. Good Jobs First, a nonprofit tracking government economic development subsidies, reported that five companies receive 82 percent of the benefit, though Virginia’s disclosure rules prevent their public identification.

Senate vs. House

Senate President Louise Lucas wants to end the exemption entirely, effective January 1, 2027, accelerating the 2035 sunset by eight years. Her stated position: “We will not pass a budget that puts data center tax breaks ahead of hard-working Virginia families and I am not backing down now.” The Senate calculates this would recover more than $1 billion annually for the state general fund.

House Speaker Don Scott and House Appropriations Chair Luke Torian want to preserve the exemption through 2035 but add new clean energy compliance requirements. Data centers would need to demonstrate conformance with renewable energy or clean energy standards to continue qualifying. Scott has argued that ending the exemption would eliminate union jobs. Governor Spanberger has expressed caution and concern about the state honoring commitments made to companies that invested based on the existing rules.

The stalemate is structurally unusual. Virginia Democrats control all three branches of state government. The budget impasse is entirely an intraparty dispute. Budget conferees had not released joint framework language as of April 9.

Why Northern Virginia Is the Center of This Fight

The Northern Virginia data center market, centered on Loudoun County’s Data Center Alley in Ashburn, is the largest concentration of data center capacity in the world, with approximately 4 gigawatts of operational inventory at the end of 2025 according to CBRE. Loudoun County reported data center tax revenues of approximately $895 million in FY2025, representing approximately 38 percent of the county’s General Fund revenues, with FY2026 projections exceeding $1 billion.

The concentration is the product of compounding network effects built over 30 years, not the tax exemption. In 1992, a consortium of network providers including Metropolitan Fiber Systems and UUNET formed MAE-East, one of the first public internet exchange points, in the Washington D.C. area. By 1997, AOL had built one of the first data centers in Ashburn, making Northern Virginia a center of gravity for internet infrastructure. By 1998, MAE-East had relocated to Loudoun County and Equinix had opened its first data center there. Redundant fiber loops and proximity to federal government technology demand and East Coast population centers drove continued growth. Virginia’s 2008 exemption accelerated that growth substantially but did not originate it.

The industry’s argument against elimination is that 35 other states offer comparable exemptions, and Virginia would be crossed off the investment shortlist if it became the only major market without one. The counter-argument from Good Jobs First is that the structural advantages of Northern Virginia, fiber concentration, existing interconnects, proximity to federal demand, exist regardless of the exemption, and operators building there are not making location decisions on the basis of a sales tax rate.

What Elimination Would Cost Operators

Virginia’s combined state and local sales and use tax rates run from 5.3 to 7 percent depending on locality, with Northern Virginia localities at the higher end. Against $33.2 billion in covered equipment purchases in FY2025, the effective annual tax obligation for the industry at a 5 percent rate would be approximately $1.6 billion, consistent with the state’s reported revenue loss figure. For a hyperscaler spending $5 to $10 billion annually on Virginia equipment, new annual tax obligations would range from $265 million to $700 million. For a colocation operator running a $500 million campus build-out, the tax hit on that project alone would be $26 to $35 million. Virginia Business reported that the per-job cost of the exemption in FY2025 worked out to $1.2 million per new job, a figure Senate Democrats cited as evidence of inefficiency.

Colorado Is Taking a Different Approach

While Virginia debates whether to tax data center equipment, Colorado’s largest utility is proposing to make data centers pay for the power infrastructure required to serve them. Xcel Energy submitted a large load tariff proposal to the Colorado Public Utilities Commission on April 2, 2026. Under the proposal, customers consuming more than 50 megawatts at peak, primarily data centers, would pay for all electric transmission, substations, interconnection upgrades, and new generation needed to serve their load. Upfront costs include a $120,000 initial deposit plus load and transmission study fees, bringing the total to approximately $600,000 before a connection is made.

Xcel projects $22 billion in infrastructure spending by 2040 to serve potential data center demand growth in Colorado and does not want existing residential and commercial customers to subsidize it. The Colorado Office of the Utility Consumer Advocate called the proposal “a good framework to ensure other customer classes are not hurt.” Utilities have now approved 29 large-load tariffs in 2025 alone, bringing the national total to 77 arrangements across 36 states.

The two approaches represent different theories about how data center growth should be governed. Virginia is debating whether to remove a capital expenditure subsidy that was designed to attract investment and has grown larger than anticipated. Colorado is designing a system to shift ongoing infrastructure costs onto the customers whose demand creates them. Both are responses to the same underlying reality: data center density is growing faster than the policy frameworks designed for an earlier period of the industry’s development.