Virginia Viewpoint: Budget Deal Reached

After three months of extra time, Virginia’s budget has found the back of the net. But the final whistle has not yet been blown.

The Virginia General Assembly convened on Monday to vote on a compromise budget agreement, bringing the Commonwealth’s nearly $205 billion spending plan close to the finish line just ahead of the July 1 start of the new fiscal year. The deal, announced last Friday evening, resolves the central dispute that stalled negotiations — how to tax Virginia’s data center industry — while also making significant new investments and establishing a long-awaited retail cannabis market.

The budget compromise, which funds the Commonwealth through June 30, 2028, now heads to Governor Spanberger for her consideration.

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Breaking the Impasse: A New Data Center “Consumption” Tax

The issue that defined this budget fight since February was the future of Virginia’s sales and use tax exemption for data centers — a long-standing incentive estimated to cost the state roughly $1.6 billion annually. The Senate initially pushed to eliminate the exemption outright to unlock more state revenue; the House rejected that position, arguing that preserving the incentive was vital to protecting industry investment and competitiveness.

The compromise aims to thread that needle: while the sales and use tax exemption remains intact, a new energy consumption fee has been levied on the industry. Set at $0.011 per kilowatt-hour of electricity consumed monthly at each facility, the fee is projected to generate up to $600 million per year. This revenue is capped annually, meaning any overages will be refunded to data centers on a pro-rata basis after the close of the fiscal year. Over the biennium, the new fee is expected to net the state $1.2 billion.

The conference report also directs the State Corporation Commission (SCC) to collect data on data center electric service agreements, water usage, and generator permitting. Furthermore, it authorizes the Department of Environmental Quality (DEQ) to develop data center noise regulations and identify areas facing cooling water scarcity.

Because the Joint Subcommittee on Tax Policy is slated to review the sales and use tax exemption and other data center impacts later this year, the exemption will highly likely return as a hot-button issue during the 2027 legislative session.

Adult-Use Retail Cannabis Market

The budget also fulfills a years-long effort to establish a regulated adult-use retail cannabis market in Virginia. After Governor Spanberger vetoed the General Assembly’s retail cannabis bill last month, the two sides ultimately negotiated an updated framework, unveiled jointly by Spanberger and bill patrons Sen. Lashrecse Aird and Del. Paul Krizek in mid-June.

The agreement launches Virginia’s regulated cannabis retail market on July 1, 2027, with an initial cap of 350 stores statewide. It establishes a tiered, combined tax rate ranging from 12.3% to 16.5% — which includes a 6% state excise tax, a 1% to 3.5% local tax, and the standard 5.3% to 7.0% state sales tax. The state excise tax is scheduled to automatically rise to 8% in 2029.

Meanwhile, the Virginia Cannabis Control Authority is authorized to issue up to 100 microbusiness licenses by May 1, 2027.

To accompany the market launch, a $250 civil penalty for public consumption will also go into effect.

Standard Deduction Increase

To provide broad-based tax relief, the new budget increases the standard income tax deduction. For single filers, the deduction rises from $8,750 to $9,200 in 2027 and to $9,300 in 2028. For joint filers, it increases from $17,500 to $18,400 in 2027 and to $18,600 in 2028.

K-12 Education

The conference budget directs over $1.4 billion in expanded funding toward public education, anchored by several major investments:

• Teacher Pay Raises:A 4% salary increase in each year of the biennium for all Standards of Quality (SOQ)-funded instructional and support positions.
• Optional 1% Sales Tax for School Construction:Subject to voter approval via referendum, localities will have the option to impose a 1% local option sales tax dedicated to school construction and renovation costs. In Planning District 8 in Northern Virginia, localities may choose to use these funds for public transportation, or a combination of both infrastructure needs. These referendums could appear on ballots as soon as November 2026. Currently, this unique sales tax allocation is only afforded to a handful of localities.
• Special Education:Funding for the Special Education Add-On established in 2025 will more than double, injecting $148.4 million over the biennium. This raises add-on rates for Level I students from 4.75% to 9.25%, and for Level II students from 5.25% to 17.5%. An additional $10 million expands the SISNA program, aiming to reduce costly private day school placements.
• Per-Pupil Funding:An allocation of $60 million in General Funds (GF) to boost the Infrastructure and Operations Per Pupil amount.
• At-Risk Add-On:An additional $28.9 million over the biennium to increase the maximum At-Risk Add-On from to 48.85%, while expanding permissible uses to include student physical and mental health initiatives.
• School Breakfast:A $17.8 million biennial investment to raise the per-meal reimbursement rate from $0.28 to $0.50, a move intended to drive higher student participation.
• Early Childhood Education:The budget allocates $137 million over the biennium to fund additional Child Care Subsidy Program slots for families earning up to 85% of the state median income, alongside $25 million to launch a new Employee Child Care Assistance Program through FY 2030.

RGGI Reentry

The “caboose” budget — which handles appropriations through June 30, 2026 — already included language requiring the Commonwealth and its agencies to rejoin the Regional Greenhouse Gas Initiative (RGGI). The newly negotiated budget maintains this mandate but introduces a key amendment: 45% of the revenue generated from RGGI will now be diverted back to ratepayers as utility rebates (excluding large commercial customers, who are ineligible). Previously, these funds were entirely dedicated to community flood preparedness projects and low-income energy efficiency initiatives.

Looking Ahead

With the General Assembly’s approval, the budget has been transmitted to Governor Spanberger for her signature. While the Governor was complimentary of the budget, she did not indicate whether she would sign it outright.

Her options include signing the budget, allowing it to become law without her signature, vetoing it entirely, proposing amendments, or issuing line-item vetoes. If she chooses to amend or veto any part of it, the General Assembly must reconvene swiftly to vote on her decisions ahead of the July 1 effective date.

General Assembly passes a budget, consumption tax for data centers included 

By Elizabeth Beyer and Matt Busse, Cardinal News

Virginia legislators advance $205 billion budget including new tax on data centers

By Nathaniel Cline, Shannon Heckt, Charlotte Rene Woods, and Samantha Willis, Virginia Mercury

Spanberger, legislators roll out retail weed plan, set to launch in July 2027 

By Samantha Willis, Virginia Mercury

HB 30 Conference Report Summary Presentation 

Senate Finance and Appropriations Committee Staff, June 22, 2026

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