Want a good example of the “tail wagging the dog?” Look no further that this year’s budget process in Virginia. The “dog” is a $74 billion budget that needs to be passed by June 30 to avoid a government shutdown. The “tail” is the data center industry — and whether the state should end tax exemptions for the industry that otherwise expire in 2035. The proposed House budget did not change the exemption, and legislation to terminate the program failed during the regular session. Rather than wait for a new bill in a new session, Senate Democrats and Sen. Louise Lucas, a leading critic of the subsidies, inserted language into its budget to end the program, and proposed using the savings to increase spending in other areas. The House rejected that approach.
Under our state constitution, Virginia government is not authorized to operate without a budget in place by July 1. While the General Assembly has failed to pass a budget by the end of its regular session in March 11 times since 2000, it has always met the fiscal year deadline. The closest call came in 2006, when Gov. Tim Kaine signed the budget on June 30. The House just canceled its plans to return to Richmond on June 18, and it is not clear when the budget impasse will be resolved.
The data center trade off
The state tax exemptions for the industry means $1.9 billion less in revenue is collected by the state this year. That is a significant sum, but it represents only about 2.6 percent of the $74 billion budget proposed by the House and endorsed by Gov. Abigail Spanberger, and pales by comparison to spending on education, local government and key services. Yet, it has become the driver of the budget impasse.
The Senate budget would eliminate the subsidies; the House budget would retain them.
Spanberger, while arguing that the industry should pay its “fair share,” has also warned that terminating the incentives eight years before their scheduled expiration would damage Virginia’s business reputation and signal that the commonwealth does not honor its commitments. If a change should be made, the legislature should do it in a separate bill separate from the budget.
Since their adoption in 2008, the exemptions have helped make Virginia the nation’s second-largest data center market, behind Texas.
The industry’s economic impact has been substantial. JLARC’ s 2024 report estimated that data centers contribute roughly $9 billion annually to Virginia’s gross domestic product. They also generate significant local real tax revenue, particularly in Northern Virginia, helping many jurisdictions maintain relatively stable tax rates despite economic pressures. Supporters argue that data centers could provide a similar revenue source and other benefits for less affluent localities seeking funding for schools and other public services.
Critics also point to the industry’s huge demand for electricity. As energy consumption rises, so do the costs of generation and transmission infrastructure. JLARC projected that a typical Dominion residential customer could see monthly electricity costs increase by $14 to $37 by 2040 because of this expanding demand.
National skepticism of data centers
Virginia’s debate is unfolding amid growing public skepticism toward the industry. A recent Gallup poll found that 71 percent of Americans oppose the construction of new AI data centers in their communities, and some states have acted to restrict them. Lawmakers in New York recently passed a measure to stop construction of new centers, while legislators in 14 others have proposed construction pauses. In April, Maine lawmakers passed a temporary statewide moratorium on new data centers, only to have it vetoed by Gov. Janet Mills. Washington state has now limited its tax breaks to first-time investments in data centers, and Ohio’s Gov. DeWine paused some data center tax exemptions even as legislators failed to agree on a bill to regulate them.
Notably, most of these actions were not the result of the budget process but instead through standalone bills, typically the way legislatures consider major policy change. Data center regulation is complex policy that usually would not be considered in the budget, but in separate legislation. Virginia has traditionally avoided major policymaking through the budget, making the current approach unusual.
Policy, politics and personalities
Budget impasses usually involve major policy debates. Michigan narrowly avoided a shutdown in 2025 over transportation, with Republicans controlling the Senate clashing with House Democrats and Gov. Whitmer before compromise was reached. A recent budget fight in Minnesota focused on access to state-subsidized health insurance for undocumented adults. Virginia has not been immune from these fights. In 2012, the budget was delayed until June 11 over transportation funding and Medicaid. Two years later, Gov. Terry McAuliffe’s push to expand Medicaid produced a stalemate that lasted until June 20. In 2022, disputes over tax relief between Republican Gov. Youngkin and the Democratic-controlled legislature again forced lawmakers into overtime before reaching agreement on June 20.
This year’s conflict, however, is about more than policy.
Powerful legislators still bristle at the record number of vetoes Spanberger issued this session and claim that her office has not accorded them sufficient respect. Senator Lucas recently derided Spanberger as a “Data Center Diva,” and labeled the House Speaker “Amazon Don.”
Spanberger has largely avoided responding in kind, preferring instead to maneuver behind the scenes to isolate Lucas by pledging to support the House leadership’s push for a $74 billion budget which includes many Senate priorities. Whether that strategy can generate enough pressure on Senate conferees to reach a compromise — or even override Lucas’s objection —remains unclear. There are rumors that a fee on data centers might be substituted for the demand that exemptions be eliminated, But the data center is still driving the debate.
Uncharted waters
Budget delays are common in many states, but government shutdowns remain rare. Michigan experienced brief closures in 2007 and 2009. Minnesota furloughed 19,000 state workers and shuttered state parks during a 20-day shutdown in 2011. In 2017, Gov. Chris Christie’s demands forced the shutdown of New Jersey’s government for three days.
Other states have developed mechanisms to avoid such disruptions. Massachusetts routinely relied on temporary spending measures until ending a 14-year streak of missed budget deadlines last year. Pennsylvania and Oregon frequently use stopgap funding bills, while New York employs “budget extenders” to keep government operating.
In several states, including Kansas, Wisconsin, North Carolina, and Rhode Island, government shutdowns are avoided by statutes that authorize funding at the previous year’s spending levels until an agreement on a new budget is reached.
Virginia has no such safeguards.
Instead, the commonwealth is among a small group of states that include Minnesota, New Jersey, Maine, Michigan, Washington, Alaska and Florida, where failure to enact a budget can trigger a partial or complete government shutdown.
Because Virginia has never experienced such a closure, it would be entering uncharted territory.
Lawmakers could still pursue what has periodically been rumored: a so-called “skinny budget” that funds essential operations while postponing contentious issues. Yet such an approach may prove politically difficult because it invites comparisons to the continuing resolutions adopted by Congress that Virginians often criticize.
Meanwhile, Spanberger is almost certainly exploring contingency plans to maintain critical services should the General Assembly fail to act by June 30, including the possible use of reserve funds set aside for emergencies.
A shutdown would carry significant economic and political consequences. Essential services could be disrupted. Credit-rating agencies could begin questioning Virginia’s prized AAA bond rating. And because Democrats control both the executive branch and the legislature, their ability to govern effectively would come under immediate scrutiny.
The stakes are high, and the deadline is approaching quickly. There are strong arguments for cutting some if not all tax benefits for data centers. They should likely pay higher electric rates, so residential consumers do not subsidize their high consumption. But whatever one’s view of this issue, allowing data center issues to force Virginia into a shutdown would represent a remarkable break from the commonwealth’s longstanding tradition of fiscal governance and prudent budgeting.
David J. Toscano of Charlottesville is an attorney who served 14 years in the Virginia House of Delegates, including a time as House Democratic leader. He is the author of Fighting Political Gridlock: How States Shape Our Nation and Our Lives, University of Virginia Press, 2021, and Bellwether: Virginia’s Political Transformation, 2006-2020, Hamilton Books, 2022.
