Virginia General Assembly Special Session: Budget and Energy Tax

Virginia’s 2026 special session budget left the state’s longstanding sales and use tax exemption for data center computer equipment in place through 2035, but layered a new temporary energy-consumption tax on top of it. The Virginia data center tax passed in 2026 charges qualifying facilities $0.011 per kilowatt hour of electricity used each month, caps total collections at $600 million per year, took effect July 1, 2026, and is scheduled to sunset on July 1, 2028.¹ The tax was the centerpiece of an approximately $207 billion two-year spending plan the General Assembly finalized on June 29, 2026, two days before a July 1 deadline that would have triggered what reporting described as Virginia’s first-ever government shutdown.

How the New Energy-Consumption Tax Works

The tax applies to electricity consumed each month, covering both utility-supplied power and power a data center generates for itself.¹ If collections in a given year exceed the $600 million cap, the excess is refunded to the companies on a pro-rata basis.

It reaches data centers that meet Virginia’s existing investment and employment thresholds for the sales tax exemption program — generally $150 million invested and 50 jobs created, with lower thresholds in economically distressed localities. Facilities whose primary purpose is providing internet or communications service are carved out.²

Legislative analysts projected the tax would generate $1.1 to $1.2 billion over the two-year budget cycle.³ The budget also created a study group to evaluate the underlying sales tax exemption, with a report due in November 2026.¹ Governor Abigail Spanberger later added an amendment imposing new water-conservation requirements on data centers located in groundwater management areas.

Neither side described the outcome as a win. Senate Finance and Appropriations Chair L. Louise Lucas said she “didn’t love” the compromise. The Data Center Coalition called it a breach of Virginia’s commitment to the industry. Clean Virginia said the capped, temporary tax still gave data centers “the better end of this deal.”² Spanberger called the tax a “compromise” that “builds a strong foundation for further discussions about the future of this industry in Virginia.”¹

Why the Sales Tax Exemption Stayed

Virginia is the nation’s largest data center market, and since 2008 the state has exempted data center computer equipment from retail sales and use tax. That exemption was already set to expire in 2035.

The 2026 regular session broke down over whether to end it early. The Senate, led by Lucas, pushed to end the exemption in 2027, arguing that forgoing roughly $1.6 to $1.9 billion per year in potential revenue was no longer sustainable.⁴ Senate Democrats wanted to steer the money into tax rebates, Affordable Care Act premium subsidies, and transportation.⁵ The House, under Speaker Don Scott and Appropriations Chair Luke Torian, refused, and Spanberger agreed with them that the state needed to honor its commitments to remain competitive.⁶

The compromise that emerged three months into the special session kept the 2035 expiration date intact and imposed the new consumption tax instead.

Reserves Against Federal Cuts

Concern about federal spending decisions shaped much of the rest of the budget. Spanberger cited “economic fallout from policies enacted in Washington, including federal healthcare cuts under President Donald Trump,” and Senate Majority Leader Scott Surovell warned of a “major Medicaid funding challenge” tied to actions in Congress and the Trump administration.³

The final plan set aside:

$350 million for potential Medicaid changes.
$225 million as a reserve for state agencies facing federal funding reductions.
$200 million for the state’s self-funded health insurance fund.
$150 million for premium assistance for Virginians losing federal ACA subsidies.⁷

Pay Raises and Education Spending

The budget put roughly $1.5 billion into compensation increases: 4% raises for public school teachers and 3.5% raises for state employees. It added $159 million in school construction grants and expanded the Child Care Subsidy Program by $137.6 million to reach families earning up to 85% of the state median income.⁷ Democratic leaders called it the largest investment in public education in Virginia history.

Policy Riders Inside the Budget

Beyond spending, the budget used a mechanism known as “Part 5” to enact permanent policy changes reaching outside the two-year cycle.

Retail Cannabis Market

The budget authorized up to 350 retail cannabis shops, with sales scheduled to begin July 1, 2027. The Virginia Cannabis Control Authority received an interest-free treasury loan of up to $15 million for startup costs.⁸ House Minority Leader Terry Kilgore criticized the vehicle, saying “this is not the way we need to do a budget from now on.”⁹

Standard Deduction

The budget included a permanent increase to the state standard deduction, with specific dollar amounts set in separate legislative language.⁷

Local Sales Tax for School Construction

Localities were authorized to levy a sales tax of up to 1%, subject to voter approval by referendum, dedicated solely to school construction and renovation. The tax can last up to 20 years or until related bonds are repaid.¹⁰

RGGI Reentry Financials

Spanberger had signed reentry legislation for the Regional Greenhouse Gas Initiative in February 2026, ending Virginia’s 2023 withdrawal under Governor Glenn Youngkin. The budget filled in the money side: Dominion Energy will purchase 51 million carbon credits between July 2026 and December 2028, generating an estimated $1.2 billion in state revenue. Utilities must return 45% of that revenue to ratepayers, which analysts estimated at about $3 per month for Dominion customers, with the rest split between a Community Flood Preparedness Fund and low-income energy efficiency programs.¹¹

Passage and What Comes Next

The Senate passed the spending plan on June 22, 2026, by a vote of 23–16, and the House advanced it 71–22.¹² Spanberger submitted 14 amendments, including the data center water requirements, a grant program for career firefighter cancer screenings, and clarifications to law enforcement facial-covering rules. The General Assembly approved all 14 on June 29, and the budget became law without requiring the governor’s signature.³

Republicans called the plan “100 days late” and objected to using the budget process for cannabis, RGGI, and firearms-related policy.³ The firearms language in the budget concerned law enforcement facial-covering policies and is separate from the standalone assault-style weapons ban (HB 217 / SB 749) Spanberger signed in May 2026.¹³

Because the consumption tax sunsets on July 1, 2028, and the sales tax exemption study is due in November 2026, the underlying question of how Virginia taxes its data center industry will return in the next budget cycle.

1
Virginia Mercury. Virginia Legislators Advance $205 Billion Budget Including New Tax on Data Centers
2
Cardinal News. General Assembly Passes a Budget; Consumption Tax for Data Centers Included
3
Virginia Mercury. Virginia General Assembly Approves Spanberger’s Budget Amendments, Ending Monthslong Impasse
4
VPM. Virginia Money Committee Heads Point the Finger at Each Other on Budget
5
Virginia Mercury. Lawmakers Reshape Youngkin’s Final Budget With Focus on Affordability, No New Taxes
6
Virginia Mercury. Virginia Budget Impasse Threatens School Funding, Poses Potential Staffing Challenges
7
VPM. Virginia FY2027–FY2028 Budget Deal
8
VPM. Retail Cannabis Budget Provision
9
Alexandria Brief. Virginia General Assembly Approves Spanberger’s Budget Amendments, Ending Monthslong Impasse
10
Virginia Legislative Information System. SB30 Amendment, Section 58.1-605.1
11
Virginia Mercury. Budget Amendment Would Give Ratepayers Estimated $3 Monthly Rebate From RGGI Funds
12
News From The States. Virginia Legislators Advance $205 Billion Budget Including New Tax on Data Centers
13
Virginia Mercury. Spanberger Signs Assault Weapons Ban, Package of Criminal Justice and Energy Bills