General Assembly budget proposals address federal cuts, ending data center incentives

An earlier sunset for data center tax exemptions, wage increases for educators and state employees and premium assistance for health insurance bought through the Marketplace were included in budget amendments presented by the General Assembly on Sunday. 

Biennial budget proposals by the General Assembly’s money committees differed widely between the two chambers — the House proposal outlines $71.5 billion in appropriations over the biennium while the Senate proposed spending roughly $74 billion. But both chambers found common ground in efforts to increase pay for educators and state workers as well as the need to counter federal funding cuts. Neither budget proposal sought to increase taxes. 

Both House and Senate appropriations committees, controlled by Democrats, discarded much of former Republican Gov. Glenn Youngkin’s proposed spending bill, which was introduced in December before he left office. Among those initiatives on the cutting-room floor were the former governor’s efforts to eliminate taxes on tips for service workers and other tax reduction efforts. The dismissal of those tax initiatives could increase state revenue by more than $600 million between 2026 and 2028, according to the Senate money committee. 

“Gov. Youngkin’s outgoing budget had significant structural deficiencies,” Senate Finance Chair Sen. Louise Lucas, D-Portsmouth, told the Senate committee during Sunday’s budget presentation.  

“We recognized that there are some gaps that needed to be addressed,” House Finance Chair Del. Luke Torian, D-Prince William County, told reporters after the House committee adjourned. 

Both the House and Senate proposals include assistance to Virginians who purchase health insurance through the state’s Marketplace and raises for educators and state employees. Both set aside money for additional costs for the Supplemental Nutrition Assistance Program, following a new requirement by the federal government for states to share the cost if their error rate in determining eligibility and benefits is at 6% or higher. 

Both proposals include money for a second inland port, but at very different amounts, which is slated to be built in Washington County. And both chambers reinstated funding for the New College Institute in Martinsville, which Youngkin had phased out in the second year of the biennium. Both proposals offer localities the option of implementing a 1% sales tax to go toward school construction through a local referendum. Tax increases are not included in either spending bill. 

Regardless of their similarities, the chambers’ proposals have significant differences that will need to be rectified in conference committee before the 2027-2028 biennial budget can go to Democratic Gov. Abigail Spanberger for her signature or line-item veto. Each chamber will need to pass its spending bill, and kill the opposite chamber’s bill, before they head to the conference committee to hammer out their differences. 

Data center tax incentives in the crosshairs 

The Senate money committee has proposed a 2027 expiration of a data center sales and use tax exemption that was initially slated to end in 2035. That early expiration could lead to nearly $1 billion in additional revenue over the biennium, according to the committee. 

Data center proponents and union leaders were quick to condemn the proposal Sunday evening. 

Nicole Riley, director of Virginia Government Affairs for the Data Center Coalition, argued that the Senate’s proposal would halt investment by an industry that had invested $100 billion in Virginia over the last three years. 

“The state’s own studies say that data center investments, jobs, and tax revenues could stop, existing companies could leave, and the state and its localities could lose $1.3 billion in tax revenue with the elimination of Virginia’s tax exemption program,” Riley said in a statement. 

Chris Cash, business manager for International Brotherhood of Electrical Workers Local 26, argued that union jobs and wages have “skyrocketed” over the last two years due to data centers. 

“If these punitive and ill-advised budget items become law, they will put thousands of Virginians out of work and send tens of billions of dollars of investment to other states,” Cash said in a statement. 

Ashley Kenneth, president and CEO of the Commonwealth Institute for Fiscal Analysis, lauded the Senate proposal and called it “critical action to ensure data centers pay their fair share in taxes.” 

She argued that data showed that data centers were exempt from $1.6 billion in state sales and use taxes in fiscal year 2025. 

A look at some budget differences between the chambers

The Senate committee proposed an increase of the standard tax deduction to $9,200 for single filers and $18,400 for joint filers. That increase could cost the state about $159 million over the biennium. A tax rebate of $100 for single filers and $200 for joint filers was also introduced. 

The Senate also forecast over the biennium about $71 million in revenue through excise tax for the sale of recreational cannabis, should efforts to legalize retail marijuana be successful, and $98 million in revenue through the tax of firearm and ammunition sales, should that effort be successful. 

The House forecast about $265 million in tax revenue over the biennium should so-called “skill games” be legalized. 

Both committees proposed salary increases for educators and state employees, though the House proposed a 2% annual increase while the Senate proposed a 3% annual increase. 

The House and Senate both included premium assistance for health insurance plans bought through the Marketplace, where costs for many are increasing following federal funding cuts. The House proposal provides $79.1 million in assistance over the biennium targeted toward people with income between 138% and 200% of the federal poverty level while the Senate provides $200 million in the first year of the biennium for health care coverage. 

Both chambers are expected to introduce and vote on their respective budget bills in the coming week. 

House and Senate have vastly different amounts for proposed inland port in Southwest 

The House and Senate committees included money in their budget proposals for the construction of an inland port in Washington County, but both proposals may be woefully underfunding the cost to build such a port. The House earmarked $2 million for a study while the Senate maintained Youngkin’s initial $35 million proposal for the project. 

Since 2022, officials have been studying the feasibility of building an inland port in Southwest Virginia to move shipping containers to and from the Port of Virginia in Hampton Roads by rail, which would be cheaper than using trucks.

The project is proposed for the 400-acre Oak Park Center for Business and Industry in Washington County, which is close to Interstate 81 and a high-capacity Norfolk Southern rail line that already handles traffic to and from the Port of Virginia.

Officials have said it could potentially lead to hundreds of new jobs in the region if manufacturers, warehouses and other businesses develop around it.

A September report from the Virginia Port Authority estimated that the inland port would cost approximately $125 million.

That report concluded that the inland port likely would not generate enough cash flow to cover the upfront investment and would not spur sufficient private sector investment nearby. The authority recommended that Virginia not pursue the project at this time.

In November, the authority’s CEO and executive director, Stephen Edwards, announced he would step down for a position in private industry. He now is CEO of Hornblower Group, a provider of ferry transportation infrastructure. The port authority’s chief administrative officer, Sarah McCoy, is serving as interim CEO.

Youngkin was apparently unfazed by the port authority’s September report. In December, his budget proposal included $35 million for the project, and he called it “a really important investment in the future of Southwest Virginia but also the commonwealth” that would better connect Southwest Virginia companies with the Port of Virginia and the state’s rail system. 

Staff writer Matt Busse contributed information to this report.