Virginia has a data center boon. Officials debate whether it's time to
scrap its tax breaks
[March 12, 2026] By
OLIVIA DIAZ and MARC LEVY
RICHMOND, Va. (AP) — Nearly two decades ago, Virginia gave tech
companies a tax break on equipment and software, and they began to
build. The state became a data center hub, and they kept building.
Residents bemoaned the noise while they built some more. Artificial
intelligence boomed, and the power grid strained — still, more building.
Now, amid a growing national pushback on data centers, Virginia senators
have voted to end a projected $1.6 billion annual tax break, requiring
the industry to resume paying a minimum 5.3% sales tax. The proposal has
left some opponents warning that it would bring construction of data
centers in Virginia to a screeching halt.
“We have now left the ‘NIMBY’ phase: Not In My Backyard,” Republican
state Sen. Mark Obenshain said last month. “And we've entered the
‘banana’ phase: Build Absolutely Nothing Anywhere Near Anything.”
Over the past 18 years, Virginia became the world's largest data hub.
The debate taking place there comes as dozens of communities nationwide
are fighting data centers in local zoning meetings, politicians are
growing anxious about AI's effect on household electricity bills and
lawmakers are considering reducing tax breaks — or scrapping them
altogether.
The state tax department says the industry has invested more than $80
billion in Virginia and created thousands of jobs over the past two
years. Obenshain is not the only one concerned about taxing it. The Data
Center Coalition, which represents tech giants, said the tax would
“effectively halt investment” from the industry. Just this month, Amazon
Data Services bought land from George Washington University in northern
Virginia for a data center, officials said.
A big debate over a big tax break
It's far from guaranteed that the state Senate's proposal will pass the
House. But it's already causing infighting among Democrats, fueled by a
looming budget deadline.
Gov. Abigail Spanberger's office said she was wary of “going back on
Virginia’s commitments to businesses that have invested in the
Commonwealth.”
Democratic Sen. L. Louise Lucas, who chairs the finance committee and
supports the tax proposal, retorted on X: “Gov. Spanberger thinks our
chicken isn’t cooked — then what is the Senate supposed to pluck out of
our budget? Raises for teachers, health insurance assistance, transit
support, a tax rebate, or childcare slots?”
Lucas' proposal reflects growing pushback nationwide as the aisles of
server racks in data centers have gotten increasingly large and
seemingly endless, with campuses of server warehouses, electrical
substations and backup diesel generators dwarfing the footprints of
factories and stadiums. Some need more power than a small city, more
than any utility has ever supplied to a single user.
The regular perks for data centers
Tax breaks have been a regular perk for developers of data centers, both
big and small. State and town officials have seen them as an economic
boon and competed with each other to land them, in part by granting
property tax abatements and sales tax exemptions.
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Cars drive past data centers that house computer servers and
hardware required to support modern internet use, such as artificial
intelligence, in Ashburn, Virginia, July 16, 2023. (AP Photo/Ted
Shaffrey, File)
 Those tax breaks let developers
spend money tax-free to equip a data center with pricey things like
servers, routers and HVAC equipment and, in some cases, to buy the
materials to build them.
In Virginia, House Democrats are pushing to keep the tax breaks in
place, and are sparring with senators. Lawmakers negotiating the
budget have until Saturday to agree on and pass a spending plan,
when their legislative session is set to end.
The move to end the tax breaks won bipartisan support in the Senate,
with 21 Democrats and seven Republicans voting for it.
Sen. Richard Stuart, a Republican, said he didn't think repealing
the tax break would affect tech's rush to build in Virginia: “This
ain’t going to slow this train down one iota.”
States rethinking tax breaks for data centers
Other states have moved to curtail such tax breaks, or add
conditions.
In Minnesota, lawmakers last year removed the sales tax exemption on
the purchase of electricity by the largest data centers, imposed a
fee for electricity use and toughened regulations, including
scrutiny over their water use.
Lawmakers in Washington state are advancing legislation this year
that would keep the tax break for new data centers, but get rid of
it for existing data centers that spend money to replace or upgrade
equipment. That is worth $83 million for the state in the first
year.
In Illinois, Gov. JB Pritzker last month called for a two-year
“pause” on data center tax breaks, citing rising household electric
bills, while Arizona Gov. Katie Hobbs said she wants to eliminate
the state's sales tax exemption completely. She called it a
“corporate handout.”
Bills to repeal the tax breaks have been introduced this year in
Arizona, Michigan and Georgia, even as tech companies have proven
adept at lobbying in statehouses.
Lawmakers in Georgia passed a bill imposing a two-year pause on the
state’s sales tax exemption for building and equipping data centers,
but Georgia Gov. Brian Kemp in 2024 vetoed it.
Virginia senators still face opposition. The International
Brotherhood of Electrical Workers lobbied at the statehouse, urging
lawmakers to protect data centers.
“We need this industry,” Dorian Hargrave, a Virginia-based
electrical worker, said in a statement. “If we lose it, our economy
is going to take a very big hit.”
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