Most of Virginia’s spending on economic development incentives over a recent 10-year period went to data centers in the form of a tax break, according to a report released this week.
Data centers are eligible for a state sales and use tax exemption on computer equipment and software, provided they meet certain investment and job-creation criteria.
That exemption — which was the topic of extensive debate during the past General Assembly — accounted for about $4.1 billion of the $6.8 billion that the commonwealth put toward economic incentives between fiscal years 2016 and 2025, or about 60%, according to the report from the state’s Joint Legislative Audit and Review Commission.
The data center exemption constitutes the majority of that 10-year period even though reliable spending data for the data center tax exemption is only available since fiscal year 2021, according to the report.
“Better information on the tax savings because of the data center exemption and because of data center growth in the state has resulted in dramatic increases in spending estimates on the exemption beginning in fiscal year ’21,” Ellen Miller, the commission’s chief economic development and quantitative analyst, said Monday while presenting the report to state lawmakers.
The report noted that tax exemptions averaged $812 million in the five years since and totaled an estimated $1.4 billion in fiscal year 2025.
It also said the exemption policy created 29 jobs for every $1 million of tax revenue that data centers didn’t have to pay and that for every $1 that Virginia spent on the exemption tax incentive, the state received 22 cents in revenue.
Miller noted that the report does not include local impacts such as a county’s business personal property taxes. She said that as long as localities have not set their tax rates very low, data centers “should be generating a good amount of revenue for the locality.”
Virginia has been dubbed the “data center capital of the world” due to Northern Virginia’s outsized quantity of the buildings full of computer servers that power the online world.
The industry is expanding in Southside and Southwest Virginia, with multiple projects either publicly announced or rumored to be in motion. Appalachian Power has said it is seeing “explosive” demand for electricity from large potential customers, “primarily” data centers.
Another finding from the new audit and review commission report: The data center tax exemption is not as influential as previously thought when it comes to data center companies choosing whether to set up or expand in Virginia.
Previous reports attributed 90% of data center location and expansion decisions to the existence of Virginia’s sales tax exemption, the commission said. The latest report revises that downward, saying about 50% of such decisions were made based on the exemption.
Miller said the change was due to more recent research on the impact of sales tax exemptions.
Other economic development incentives from Virginia include different types of tax incentives, grants and programs that offer loans and gap funding.
The data center exemption is 16 times bigger than the next largest incentive, a program that helps eligible manufacturers save on income taxes.
Business savings from tax incentives other than the data center exemption have totaled about $175 million annually since fiscal year 2023, according to the report.
Although grants make up just 16% of economic development incentive spending, they offer higher economic benefits than the data center exemption in part because they’re invested in industries such as manufacturing that have a greater impact on the economy through the goods they produce and the wages they pay, according to the report.
For every $1 million that Virginia spends on grant awards, 131 jobs are created, and the state receives $1.29 in revenue for every $1 spent on grants, according to the report.
