Virginia legislators and the governor are locked in final budget negotiations, and the biggest decision before them is whether to continue a costly tax break for data centers. Specifically, lawmakers are debating a state sales tax exemption for the equipment that fills hundreds of tech-industry facilities in our state.
Tax policy decisions are a chance to imagine the future we want to live in. As Virginia faces slowing revenue growth and families continue to feel the effects of rising costs and underfunded services, lawmakers should think beyond penny-pinching and focus on what it takes for communities to thrive. That starts with asking a booming industry to contribute its fair share to invest in the services that families rely on.
Two years ago, Elon Musk’s DOGE project decimated the federal workforce and many important programs, resulting in layoffs and funding cuts felt across the commonwealth.
Almost a year later, Congress and the president spent the Fourth of July 2025 celebrating their “One Big Beautiful Bill,” or H.R. 1, which made massive cuts to Medicaid, the Affordable Care Act, and SNAP to help pay for tax handouts to millionaires and billionaires.
This recent history is creating hardship for Virginians across the commonwealth. Tens of thousands of Virginians were among the first to be put out of work as federal agencies were undercut by the current administration. So far, 76,000 people in Virginia have dropped their health insurance since Congress allowed enhanced ACA tax credits to expire to pay for H.R. 1, causing health care premiums to spike for many. More people are expected to be priced out of their coverage this year. Compounded with the impact of higher fuel and everyday costs, Virginia state employees, home health workers and teachers’ pay increases struggle to keep pace.
Virginia cannot reverse federal decisions, but lawmakers can decide how to respond. One place to start is reconsidering a tax break for data centers that has become increasingly difficult to justify as the industry has grown and matured.
The data center industry is already reaping the benefits of Trump’s megabill, with many companies receiving retroactive tax cuts that further lower their effective tax rate. For example, analysis shows that for its 2025 taxes, Amazon had an effective federal income tax rate of 1.4%, lower than what the vast majority of everyday people in Virginia pay on their state income taxes alone. Everyone in Virginia should pay their fair share, and the data center industry is uniquely positioned to pay more in state taxes.
Now, states across the country are recognizing that data center tax incentives are not helping meet the moment as the affordability crisis continues to worsen. Just as other states copied Virginia by adopting tax incentives to attract data centers, many are now reconsidering them.
According to the State Revenue Alliance, more than a dozen states are actively considering tax increases or new regulations on data center companies.
Virginia lawmakers have an opportunity to make sure that tax policy keeps pace with the rapid growth of a booming industry and supports our commitments to students, families, and communities across the commonwealth. The Senate budget would end the sales and use tax exemption for data centers, raising over $1 billion over the next two years for priorities like health care, public education and compensation for public service workers. And Virginia voters agree: 56% oppose these tax breaks, compared to 37% who support them.
This should not be controversial. While Virginia families face rising costs and growing economic uncertainty tied to federal funding cuts and disruptions from the Trump administration, Virginia should protect our people, not a tax break that cost Virginia nearly $2 billion in the last fiscal year alone.
Across the country, lawmakers are asking the wealthiest corporations and industries to contribute fairly to the communities that make their success possible. Several have established new tax brackets for millionaires.
Ending the sales tax exemption for data center equipment would ask the industry to contribute more to a state that has supported its success. As Virginia families face higher costs, economic uncertainty, and the consequences of federal funding cuts, lawmakers should prioritize investments in people over another tax break for corporations that are already thriving.
Virginia lawmakers cannot control every decision made in Washington. But they can choose whether to protect a costly, unnecessary tax break or invest in the health, education and economic security of people across Virginia. The Senate budget makes the right choice.
Megan Davis is a senior policy analyst for tax and budget at The Commonwealth Institute.
