With a protracted budget battle behind them, Gov. Abigail Spanberger and the General Assembly's money committees are looking for future sources of revenue to offset cuts in federal government spending on safety net programs and a declining labor market.
Those options include the potential repeal of a state sales and use tax exemption for purchases by data centers that was the center of a budget standoff earlier this year that pitted the Senate against Spanberger and the House of Delegates, who opposed the repeal. The battle ended on the day before the last fiscal year ended, with a compromise that includes a new state tax on energy consumption by data centers that will generate an additional $600 million a year for the general fund budget to pay for education, healthcare and other core state government services.
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Spanberger appeared before the legislature's money committees Wednesday for the first time since becoming governor in January to celebrate the investments in public services they made together in the two-year budget that the assembly adopted June 29, as well as legislation to address her priority of lowering costs that Virginians pay for prescription drugs, electricity and housing.
"In my view, one of the most valuable things we can offer local government, businesses and our fellow Virginians right now is stability," she said, with her husband, Adam, sitting behind her. "It's being a partner you can count on."
"So yes, despite the economic chaos coming out of Washington, Virginia remains resilient," she said in her half-hour speech. "But that is not luck; it is the product of steady, deliberate choices."
'Cautiously optimistic'
Virginia began the new fiscal year July 1 by carrying over $938.8 million more than expected from the previous fiscal year, driven largely by income taxes on stock market gains and consumer spending that remained strong despite inflation that remains higher than the Federal Reserve Board wants. Revenues continued to grow faster than expected in July, when the state collected $78.2 million more than it expected, an increase of more than 3% based on consumer spending, corporate and payroll income taxes.
However, the governor and state policymakers are keeping a wary eye on the state's labor market, which declined by about 44,000 jobs in the last fiscal year because of cuts in the federal government workforce and spending on private contractors. Those losses were partially offset by higher wages and a real estate market that grew faster than expected with the Federal Reserve unwilling to cut interest rates until inflation subsides.
“I'm cautiously optimistic, but I just don't have any good feeling that we're going to have the level of funding in the out years to take care of our core services. So that's where I am right now,” said Senate Finance Committee chair Louise Lucas, D-Portsmouth.
Del Terry Austin, R-Botetourt, senior Republican on the House Appropriations committee, said, “I’m just happy that the revenue growth is still there."
"And you know, these economic times, there's never any certainties," Austin said. "But we've been in a posture for that revenue growth to be there and continue, and you know you always wonder at what point is it going to go the other way, but so far, so good."
House Finance Chair Vivian Watts, D-Fairfax, is wary of relying on income tax revenue paid on stock gains, which was a big part of the surplus in the last fiscal year.
“Everything is so unpredictable right now," said Watts, who compared the stock market now to where it was before the crash in 1929.
“There’s definitely irrational exuberance, far greater than it was," she said. "So we have got to be very cautious about where we are right now."
The Joint Subcommittee on Tax Policy began its work on other options for raising revenue that they think the state will need to make up for federal cuts to Medicaid and other safety net programs under President Donald Trump and the Republican-controlled Congress. The tax exemption for data center purchases of computer equipment and software will be the centerpiece of those discussions, as the assembly looks ahead to Spanberger's presentation of revisions to the budget in December and the 45-day legislative session that will begin in January.
Spanberger clashed publicly with Lucas during the budget debate over the Senate's insistence on repealing the data center tax exemption, but the governor praised what she called "a thoughtful approach" in the budget to data center demand for electricity by imposing an expanded tax on their energy consumption. She also praised the State Corporation Commission for requiring data centers to pay the cost of building new electric transmission facilities, built primarily to serve them.
"This will save Virginia families hundreds of millions of dollars over time," she said.
The governor also emphasized legislation that the assembly adopted, which she signed into law, to require stricter air pollution emissions by diesel generators that provide backup power to data centers and public accounting of the water they use to cool their equipment, develop noise regulations to protect their neighbors' quality of life and ensure that data centers pay for the infrastructure costs to serve them.
"And looking ahead to next year, there is more to be done — and Virginia should be leading the nation in setting the highest standards for data center energy usage, water consumption, community benefit, and we should be driving innovation across all sectors," she said.
Spanberger lightened the typically ponderous tone of a revenue discussion when she referred to the budget as one “we passed together, it felt like just the other day.” Then she ad-libbed an addition to a line about her administration’s several listening tours by noting: “I'll be honest, I don't always get the same reception everywhere I go.” (The governor was booed recently at the Old Fiddler's Convention in Galax in deep Southwest Virginia.)
Spanberger also said sending a daughter off to her first term in college made the governor think she was just finishing her own first semester of the eight she's allowed. One lobbyist commented afterward that the governor brought a rare human touch to the revenue speech.
Tax policy subcommittee
In contrast, the tax policy subcommittee meeting was all facts and figures as legislators chart a path forward on data centers.
In its first meeting Wednesday, the joint subcommittee elected House Appropriations Chairman Luke Torian, D-Prince William, as its chairman and Lucas as vice chair. She has conducted a listening tour this year in seven localities affected by data centers — with more to come — and proposed that the subcommittee hold at least one meeting this year in a community, rather than at the General Assembly Building in Richmond.
The sales tax exemption cost the state $1.9 billion in forgone tax revenue last year — about the same amount it loses under a longstanding tax exemption for purchases by manufacturers.
Virginia already had a tax on energy consumption, but the new budget creates a higher rate for data centers. The data centers will begin to pay the new tax next month, based on energy consumption from July 1 through Aug. 31.
Nicole Riley, director of Virginia government affairs for the Data Center Coalition, called the meeting "a valuable and important reminder of the thousands of good-paying jobs, billions in tax revenue, and responsible operations that are associated with Virginia’s data center industry."
"We share Gov. Spanberger’s and legislative leaders’ goals of ensuring that Virginia can capture the significant economic opportunities presented by data center development while protecting the interests of residents and communities across the Commonwealth," Riley said.
“Clear, predictable, and workable standards can help localities and companies plan and invest with confidence as they explore opportunities to secure billions of dollars in investment, create jobs, and strengthen local economies," she said. "One-size-fits-all policies that stifle investment and job creation are clearly not the path forward."
Lucas was unmoved by the presentations, citing citizen concerns that they are "being steamrolled" by state and local governments.
"I don't intend to back down on this issue," she said.
Spanberger, who served three terms in Congress for Virginia's 7th District, also took aim at Trump and Congress for the damage she said they have done to Virginia under a sweeping package of tax cuts adopted last year in the so-called "One Big Beautiful Bill" that she said "made the deepest cuts to Medicaid and (the Supplemental Nutrition Assistance Program) in history."
As a result, she said, "Virginia families are facing hunger, and hundreds of thousands risk losing their medical coverage."
"We also know that this is just the beginning, because this law will continue to shift monumental costs from the federal government to the states — to our state’s budget — while eking away at our country’s healthcare system as additional elements go into effect year over year — with some of the most damaging elements cynically set to go into effect after the 2026 and 2028 elections," she said.
The new two-year budget includes more than $500 million to deal with the effects of federal cuts to Medicaid, SNAP and other safety-net programs, including $150 million to help Virginians pay premiums on health insurance they buy on the state-run marketplace. Congress declined to extend enhanced federal subsidies for premium assistance, which expired at the end of last year.
"The reality is that state funds simply cannot make up the gap the federal government is leaving us," Spanberger said. "But we can be pragmatic, and thoughtful, and steady in how we govern through it. And I can pledge that our Commonwealth will do everything in our power to contend with these catastrophic federal policies."
Del. Joe McNamara, R-Roanoke County, said Spanberger's message isn't consistent with the state's financial performance.
“I think a central message from the governor and the secretary of finance was our economy has been destroyed by a combination of actions out of Washington and our former Republican administration, and the reality of the situation is we had a $1 billion budget surplus, which is largely the result of actions that occurred prior to her administration,” McNamara said after the speech. “We have a revenue stream … which is more than double the rate of inflation."
But Del. Kirk McPike, D-Alexandria, said his constituents have felt the direct effects of spending cuts by Trump and the so-called Department of Government Efficiency that Elon Musk led last year.
"We're seeing firsthand the impacts of the DOGE cuts and the loss of federal employees," McPike said after his first gubernatorial budget speech.
He said the part of the legislature's work in its next session is "making sure that those workers are whole, our economies are sustained, and that Virginia evolves, too."
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