Gov. Abigail Spanberger met General Assembly budget negotiators for breakfast on Friday, but showed little appetite for the economic risks of repealing Virginia's sales tax exemption on equipment essential to the state's rapidly expanding data center industry.
Spanberger, in her first legislative session since becoming governor on Jan. 17, didn't directly address the Senate's proposal to ditch the data center tax break in the letter that she provided budget conferees after the meeting, but she hinted at her concerns about the Virginia economy even before a new federal report estimated that the U.S. economy lost 92,000 jobs last month.
"I know we share a commitment to protecting Virginia's fiscal integrity, upholding our commitments to businesses that we have invited to invest in the Commonwealth, and maintaining the AAA bond rating we have held since 1938," the Democratic governor wrote in a two-page letter to the six delegates and five senators who are working to reconcile their competing two-year budget plans. "We need clear expectations for the Commonwealth's future revenue to ensure we have structural balance."
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After the meeting, the governor's office emphasized that concern in response to a question about her position on the data center tax break.
“As budget negotiations advance, the Governor has expressed to House and Senate leaders her serious concerns about going back on commitments Virginia has made to businesses that it recruited to invest in the Commonwealth," spokesperson Libby Wiet said. "The Governor is committed to being a partner to facilitate conversations between House and Senate budget negotiators.”
Spanberger ordered the state tax department to conduct a new forecast of revenue projections for the next two fiscal years, beginning on July 1.
Secretary of Finance Mark Sickles, himself a former House budget negotiator, acknowledged the negative jobs report in his response on Friday afternoon.
"In assessing the economic headwinds facing the Commonwealth, there is no evidence that the estimates used to develop our current budget should be altered in either a positive or negative direction," Sickles said in a memo to the governor.
Spanberger also outlined 13 budget investments "that we should all support," such as housing, child care, body-worn cameras for law enforcement and corrections staff, full funding of the Washington Metro transit system, site readiness for economic development prospects, teacher salaries, career and technical education, improved school funding formulas, and money for wastewater treatment and reducing polluted runoff.
High among her priorities were addressing cutbacks in federal support for Medicaid, food assistance, health care insurance premium subsidies and "backfilling lost federal emergency management support."
Senate Finance Chair Louise Lucas, D-Portsmouth, said before the meeting that she would "stand my ground" on repealing the data center tax exemption, which reduced sales tax revenue by $1.9 billion last year, while generating a net $2.1 billion benefit for state and local governments over five years. Repeal of the tax break would add $1.1 billion to state revenues and an additional $200 million in local education and transportation revenues as Virginia tries to make up for deep cuts in federal spending and employment.
However, House budget leaders remain concerned about the "commitments to businesses" that Spanberger mentioned in her letter. Their proposed budget would not repeal the tax exemption — currently scheduled to expire in 2035 — but instead would attach new conditions for reducing pollution and using more clean energy resources to operate.
"I don't think we go change something arbitrarily without having folks in the room that the Commonwealth has agreements with," House Appropriations Chairman Luke Torian, D-Prince William, said after the meeting.
Data centers invested more than $80.5 billion in Virginia over the past two fiscal years, more than two-thirds of it in computer equipment and software that currently is exempt from the sales tax, according to a report on Jan. 2 by the tax department and the Virginia Economic Development Partnership.
"I think 80% of our growth in the past year has come from data center-related manufacturing, employment and construction," Sickles told the Senate Finance & Appropriations Committee on Feb. 18. "We've done very well in that area."
"That is the primary source of our private sector growth," he said in response to a question by Sen. Mark Obenshain, R-Rockingham.
Virginia tax revenues have held their own, despite damage from the loss of federal government jobs and contracts from cuts by President Donald Trump since he took office almost 14 months ago. Revenues for the first seven months of the fiscal year through January were $521.4 million ahead of forecast and $1.2 billion above the same period the previous year.
But the state's unemployment rate rose by 0.7% from 2.9% at the end of 2024 to 3.6% a year later. Sickles estimated that the state has seen a net loss of 8,900 jobs this fiscal year, with almost 24,000 fewer federal government jobs because of layoffs and voluntary buyouts under pressure from the Trump administration.
"Our unemployment rate has been going in the same direction for a while now — the wrong direction," he said in response to questions by Senate Minority Leader Ryan McDougle, R-Hanover. "So, we need to be concerned about what might happen in the future."
At the same time, Virginia unemployment claims declined the second week in a row after a sharp seasonal spike late last month, and continued claims have remained steady at 20,560 through the end of February.
"The labor market here in Virginia continues to see minor week-over-week change, indicating that the landscape for workers continues to improve across the Commonwealth," Secretary of Labor Jessica Looman said in a statement on Thursday.
However, the national employment outlook swooned on Friday, with the report that the U.S. economy had lost 92,000 jobs in February and the unemployment rate ticked up to 4.4%. The actual losses are likely much lower, after factoring in severe winter weather and a nursing strike, said Bob McNab, chairman of economics at Old Dominion University, but he added that the report also revised previous job estimates for December and January downward by almost 70,000 jobs.
Those job losses include about 10,000 fewer federal civilian jobs, he said, "and we know some nontrivial portion of those jobs were lost in Virginia."
"One might suggest that prudence is the best course of action with the budget," McNab said.
Spanberger responded to the federal report on Friday afternoon.
“Today’s job numbers are a reminder that economic uncertainty is not going away any time soon," she said. "Across the Commonwealth, I’ve heard from working Virginians, small business owners, and industry leaders about the need for stability."
“I am focused on growing Virginia’s economy, attracting new business investment, and creating good-paying jobs right here at home," she said. "Over the last two months, I’ve announced $575 million in new business investment in Virginia that will create nearly 2,000 new jobs in our Commonwealth."
Her Republican predecessor, Gov. Glenn Youngkin, touted $157 billion in capital investment during his four-year term. The Virginia Economic Development Partnership estimated that 79% came from data centers.
Spanberger meets with budget negotiators as data center tax splits Virginia lawmakers
Virginia Senate budget ditches data center tax break to create more than $1 billion in revenue
