General Assembly adjourns without budget, will return April 23 (copy) (copy)
The General Assembly left Richmond without a new, two-year Virginia budget on Saturday, but the debate over state financial incentives for the data center industry will remain in the center spotlight until the legislature returns next month for a special session on April 23.
The legislature asked Gov. Abigail Spanberger to order the special session the day after its annual veto session and two days after a voter referendum on a constitutional amendment on congressional redistricting that has overshadowed much of the 60-day legislative session that began on Jan. 14.
The Senate adjourned at 7:26 p.m., 18 minutes after the House of Delegates, to end the session.
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Spanberger and the House oppose the Senate proposal to repeal the state sales tax exemption for data centers because of the potential harm to Virginia's business reputation. But they continue to look for ways — including a potential consumption tax on big energy users — to boost the amount of state revenue paid by data centers without eliminating the primary incentive that has made the state the center of the global data center industry.
Separately, the House and Senate approved compromise legislation on Saturday that Senate Finance Chair Louise Lucas, D-Portsmouth, proposed to shift the cost of providing electric power to data centers from other ratepayers to the centers themselves. Senate Bill 253 passed on a 21-18 party-line vote in the Senate and a 73-23 margin in the House. The compromise would delay implementation to be part of Dominion Energy Virginia's two-year rate-making process.
The bill would require big electric customers — primarily data centers — to pay more of the cost of electricity that public utilities buy on the regional power market that PJM Interconnection operates in 13 states, including Virginia. Data centers also would pay more of the cost of transmission lines and electric substations to serve them.
Spanberger issued a statement on Saturday night after adjournment.
“I’m tremendously grateful to legislators for their work this session to address the challenges facing Virginia families, Virginia businesses, and Virginia schools. The General Assembly has passed a slate of legislation squarely focused on making life less expensive for Virginians," the statement said.
“I remain in close contact with leaders in the General Assembly, and I look forward to calling lawmakers back to Richmond on April 23 to pass a budget that delivers on the responsible, pragmatic leadership Virginians voted for this past November.”
House and Senate budget negotiators conceded on Friday afternoon that they would need a special session to reconcile the differences between their versions of the budget, which would run from $212.7 billion to $213.7 billion, depending on the outcome of the ongoing battle over the 16-year-old sales tax exemption for data center purchases of computer chips and other equipment.
Bridging the $1 billion gulf in revenue for the competing budgets will determine how much the Democratic-controlled assembly will be able to spend on a wide range of priorities, especially education and public safety-net programs such as Medicaid, food assistance and subsidies for health insurance premiums after deep cuts in federal support under President Donald Trump and the Republican-controlled Congress.
The outcome of the budget negotiations over the next month also will determine the size of teacher and state employee raises, funding for the Washington Metro transit system and other public transportation priorities, and potential income tax cuts, including a one-time rebate of $100 for individual taxpayers and $200 for couples filing jointly that the Senate has proposed. Those investments may depend on money from the repeal of a data center exemption that cost the state $1.9 billion in revenue last year, but generated billions of dollars in tax revenue for local governments, particularly in Northern Virginia.
The repeal of the exemption also would pay for a Senate proposal to increase the standard deduction for taxpayers who don't itemize deductions on their income tax returns. The proposal would raise the deduction by $450 to $9,200 for individual taxpayers and by $900 to $18,400 for couples filing jointly.
The Senate also proposed to extend the underlying levels for the standard deduction and the refundable earned income tax credit for low-income working families, which the state has increased several times since 2019, to Jan. 1, 2030, rather than allowing them to expire at the end of this year. The House budget would make the higher standard deduction and earned income tax credit levels permanent, as then-Gov. Glenn Youngkin proposed in December in his parting budget.
The final budget also will determine the size of the first raise for General Assembly members since 1988. The House budget would increase the annual salary to $45,000 for delegates who now earn $17,640 and for senators from $18,000; the Senate proposed to raise legislative salaries to $50,000.
Senate Finance Chair Louise Lucas, D-Portsmouth, casts her proposal to repeal the data center exemption as a way to make life more affordable, which she said has been "the mantra" of the legislative session since Spanberger rode the affordability issue to a 15-percentage point victory and a Democratic sweep of statewide offices in November.
"Our responsibility to hard-working Virginians is a budget that doesn't burden them in paying for the collective services we all need," Lucas told the Senate during a spirited debate of the sales tax exemption on Friday night.
But Republicans have tried to use the affordability argument against Democrats, citing provisions they say will raise costs for Virginians by requiring paid family leave, rejoining the Regional Greenhouse Gas Initiative and expanding collective bargaining for public employees.
"The data center money is going to pale in comparison with the tax bills that are going up for Virginians," Senate Minority Leader Ryan McDougle, D-Hanover, said Friday night.
The data center exemption isn't the only target for legislators trying to address the effects of data centers on surrounding communities, but it's the biggest one. The Senate proposal to eliminate the exemption came as a surprise when Senate Finance released its budget on Feb. 22, but Sen. Danica Roem, D-Prince William, had planted the seed by proposing a budget amendment to repeal the exemption, effective on July 1, for a savings of $1 billion to the general fund budget.
"At least I gave (Sen. Lucas) the best bargaining chip I could," Roem said.
Roem, who had tried unsuccessfully to pass legislation to limit data centers to industrially zoned areas, said that residential customers "pay and pay" for new transmission lines and other utility infrastructure to serve data centers.
"It's not just pay your fair share," she said. "It's also telling them that if you want to operate here, you've got to play by the same rules everyone else does."
The assembly approved a compromise on legislation that Roem and Del. Josh Thomas, D-Prince William, had proposed that require data center developers to file a site assessment that discloses noise levels. SB 94 and HB 153 also allow local governments to require assessments of the impact of a proposed project on nearby homes, parks, schools, woods, registered historic sites and farmland. The compromise does not include Roem's proposal to limit data centers to industrial sites, although she vowed to revisit the issue again next year.
The House had adopted legislation, proposed by Del. Rip Sullivan, D-Fairfax, that would have required data centers to reduce the pollution they emit and increase their purchase of renewable energy as a condition of the tax exemption, but the Senate Finance committee killed it.
Senate Majority Leader Scott Surovell, D-Fairfax, who chairs the Commission on Electric Utility Regulation, said the State Corporation Commission had estimated in a letter on Feb. 13 that data centers accounted for 80 cents on the monthly bill for the latest rate increase approved for Dominion Energy Virginia, the state's largest public utility.
That estimate does not include the cost of power capacity that Dominion and electric cooperatives purchase on the PJM regional market. Northern Virginia Electric Cooperative has raised its monthly power cost adjustment rate three times in a year to pay for power capacity to serve customers in its territory, which includes parts of Loudoun and Prince William counties that are the center of the global data center industry.
Surovell cautioned that most other states provide a similar exemption to attract data centers for their capital investments, local and state tax revenue and jobs.
"The reason it's hitting us so hard is because we've been so successful," he said, noting that the industry is helping to sustain the state's economy against the effects of federal funding cuts and trade policy under Trump.
"We've been taking a measured approach, so far, in dealing with this industry," he said.
At the same time, Surovell praised Lucas for sparking a public debate over the data center tax exemption that he said is overdue.
"We cannot afford to continue to watch $2 billion go out the window," he said. "That's what this conversation is about."
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Michael Martz (804) 649-6964
