Virginia has a data center boon. Officials debate whether it’s time to scrap its tax breaks

Virginia Senate Moves to End $1.6 Billion Data Center Tax Break Amid Growing Pushback

Nearly two decades after Virginia offered tech companies generous tax incentives on equipment and software, the state Senate has voted to eliminate a projected $1.6 billion annual tax break for data centers. The proposal would require the industry to resume paying a minimum 5.3% sales tax, sparking intense debate about the future of Virginia’s tech infrastructure.

The decision comes as Virginia has transformed into the world’s largest data hub since implementing the tax breaks 18 years ago. Critics now warn that ending these incentives could dramatically slow construction in the commonwealth.

“We have now left the ‘NIMBY’ phase: Not In My Backyard,” Republican state Sen. Mark Obenshain remarked during recent deliberations. “And we’ve entered the ‘banana’ phase: Build Absolutely Nothing Anywhere Near Anything.”

According to Virginia’s tax department, the data center industry has invested more than $80 billion in the state and created thousands of jobs over the past two years alone. Industry representatives, including the Data Center Coalition, have issued stark warnings that the proposed tax would “effectively halt investment.” Even as the debate unfolds, tech giants continue to expand their footprint, with Amazon Data Services recently purchasing land from George Washington University in northern Virginia for a new data center.

The Senate’s proposal faces an uncertain path forward in the House, creating tension among Democrats as a budget deadline approaches. Governor Abigail Spanberger has expressed concern about “going back on Virginia’s commitments to businesses that have invested in the Commonwealth.”

This prompted a sharp response from Democratic Sen. L. Louise Lucas, chair of the finance committee and supporter of the tax proposal, who questioned on social media what programs would need to be cut instead: “Raises for teachers, health insurance assistance, transit support, a tax rebate, or childcare slots?”

The debate in Virginia reflects growing resistance nationwide to the massive scale of modern data centers. These facilities now often consist of sprawling campuses filled with server warehouses, electrical substations, and backup diesel generators that dwarf traditional industrial facilities. Many require more electricity than small cities, placing unprecedented demands on local power grids.

Tax incentives have long been a standard offering to attract data center development, with state and local officials viewing these facilities as economic development opportunities. Fierce competition between jurisdictions has led to property tax abatements and sales tax exemptions that allow developers to purchase expensive equipment and construction materials tax-free.

While House Democrats in Virginia are pushing to maintain these incentives, lawmakers face a Saturday deadline to pass a budget before the legislative session ends. The Senate measure has garnered bipartisan support, passing with votes from 21 Democrats and seven Republicans.

Some legislators remain unconvinced that repealing the tax breaks would significantly impact growth. Republican Sen. Richard Stuart stated, “This ain’t going to slow this train down one iota.”

Virginia’s reconsideration of data center incentives follows similar moves across the country. Minnesota lawmakers last year removed sales tax exemptions on electricity purchases by large data centers, imposed usage fees, and strengthened regulations on water consumption. Washington state is advancing legislation that would preserve tax breaks for new facilities while eliminating them for equipment upgrades at existing centers—a change worth $83 million in state revenue during the first year.

In Illinois, Governor JB Pritzker recently called for a two-year “pause” on data center tax breaks, citing concerns about rising household electric bills. Arizona Governor Katie Hobbs has pushed to eliminate their state’s sales tax exemption entirely, characterizing it as a “corporate handout.”

Despite this trend, the industry has demonstrated significant lobbying power. When Georgia lawmakers passed a bill imposing a two-year pause on data center tax exemptions, Governor Brian Kemp vetoed the measure.

As the debate continues in Virginia, labor groups like the International Brotherhood of Electrical Workers have mobilized to protect the industry. “We need this industry,” said Dorian Hargrave, a Virginia-based electrical worker. “If we lose it, our economy is going to take a very big hit.”

The outcome of Virginia’s legislative battle could signal a turning point in how states approach balancing economic development incentives with growing concerns about infrastructure strain, environmental impacts, and fair taxation in the rapidly expanding data center industry.