The General Assembly approved a new biennium budget on Monday, June 22, after budget conferees released a compromise conference report on the evening of June 19. The Governor now has an opportunity to review and act on the budget as passed by the legislature in advance of the end of the state fiscal year on June 30.
A preliminary overview of key items in the conference report of importance to local government follows below. VACo will be providing a more detailed analysis soon.
Tax Policy Items
- Data centers:The conference report includes a new electricity consumption tax on data center operators at the rate of $0.011/kWh for all electricity consumed at each data center per month. The tax would be imposed beginning on and after July 1, 2026, but before July 1, 2028. A maximum of $600 million raised by the tax per year would be deposited to the state General Fund, with amounts raised in excess of this amount to be refunded to each data center operator on a pro rata basis. (Item 3-5.24 #1c)
- The Joint Subcommittee on Tax Policy is directed to study the data center sales and use tax exemption and other data center impacts during the 2026 interim, to include examining the impact of the existing exemption and any potential future exemption or incentives, approaches taken in other states related to the data center industry, the estimated direct and indirect economic benefits of data center investment in Virginia, impacts on the environment and quality of life related to data center location and siting, and recommended mechanisms to provide direct revenue to the state from the data center industry. Recommendations are due by December 15, 2026. (Item 1 #7c)
- Mandatory property tax exemptions for disabled veterans: Directs the Department of Taxation to convene a work group to review the cost of mandatory property tax exemptions for disabled veterans and their spouses and the impact of these exemptions on localities. A report is due by November 15, 2026. VACo worked with advocacy partners to propose similar language during the General Assembly session. (Item 260 #1c)
- Standard deduction: Increases the standard deduction from $8,750 for single filers and $17,500 joint filers to $9,200 for single filers and $18,400 for joint filers for tax year 2027, and again to $9,300 for single filers and $18,600 for joint filers for tax years 2028 and 2029. (Item 4-14 #1c)
Compensation – SOQ Instructional and Support Positions
- Funds the state share of a 4 percent salary increase for SOQ-recognized instructional and support positions in each year of the biennium (instead of the 2 percent increase proposed in the introduced budget). Retains the language in the introduced budget providing that the state share would be prorated for school divisions that provide less than an average 4 percent salary increase. School divisions providing an average increase in excess of 4 percent in the first year of the biennium would be allowed to credit the excess portion of the increase toward the second year. The state funds must be matched based on the Local Composite Index. (Item 125 #2c)
Compensation – State Employees and State-Supported Local Employees
- Funds a 3.5 percent salary increase for state employees and state-supported local employees in each year of the biennium (instead of the 2 percent increase proposed in the introduced budget). For state-supported local employees, the salary increases take effect August 1, 2026, and July 1, 2027. (Item 469 #7c)
School Capital
- Expands the authority to impose an additional 1 percent local option sales and use tax for school capital via voter referendum to all cities and counties, a long-sought priority for VACo. Counties interested in exercising this authority in 2026 should immediately review the timeline incorporated in the budget amendment in planning for a potential November referendum. Includes additional language authorizing any county or city in Planning District 8 to impose a 1 percent voter-approved local option sales and use tax for public transportation purposes. Includes language stipulating certain local funding contributions to the Washington Metropolitan Area Transit Authority (WMATA). (Item 4-14 #2c)
K-12
- Funds rebenchmarking of the Standards of Quality and other routine and technical updates to school funding as proposed in the introduced budget.
- Provides $1 million in FY 2027 and $250,000 in FY 2028 to support the Joint Subcommittee on Elementary and Secondary Education Funding, and directs the Superintendent of Public Instruction to issue a Request for Proposals for a contractor to support the development of a new funding formula. (Item 123 #4c)
- Provides $74.4 million in FY 2027 and $74 million in FY 2028 to increase the add-on percentages applied to basic aid for special education students. (Item 125 #5c)
- Provides an additional $60 million in FY 2027 for infrastructure and operations per pupil funding. (Item 125 #6c)
- Provides $14.5 million in FY 2027 and $14.4 million in FY 2028 to increase the maximum At-Risk Add-On to 48.85 percent each year, and expands the allowable use of the funds to include initiatives to support both the physical and mental health of students in public schools, such as the hiring of nurses. (Item 125 #13c and Item 125 #9c)
Early Childhood
- Retains the introduced budget’s proposal to fund an additional 6,745 slots per year in the Child Care Subsidy Program by redirecting $71 million in FY 2027 and $66.6 million in FY 2028 from assumed nonparticipation rates for the Virginia Preschool Initiative.
- Provides $25 million in FY 2027 to fund the newly-created Employee Child Care Assistance Pilot Program, which provides matching funds to incentivize employers to contribute to employee child care costs. (Item 126 #2c)
Children’s Services Act
- Retains language in the introduced budget capping growth in state reimbursement to localities for private day special education services, which VACo had sought to remove. As an alternative approach, the conference report includes an additional $10 million in FY 2027 for reimbursements to school divisions through the Students with Intensive Support Needs Application, as well as language directing the Department of Education to expand the disability categories eligible for payments through this program, with consideration given to students with complex behavioral needs who otherwise would be referred to private day school placements. VACo strongly supports this additional funding and language. The conference report also includes language VACo supports directing the Department of Education to make recommendations on removing barriers to using funds and improving the application process, as well as directing the Department of Education to issue guidance on the use of funds to support students transitioning back to public school from private placements. (Item 125 #1c, Item 118 #1c)
- Retains the introduced budget’s reduction in the state match for community-based services funded through CSA to reflect an average state match of 71 percent. VACo had sought to reverse this action.
Natural Resources
- Deposits $189 million in FY 2027 to the Water Quality Improvement Fund for matching grants for eligible wastewater treatment plant improvement projects. (Item 368 #2c)
- Retains the introduced budget’s $43.5 million in FY 2027 for the Stormwater Local Assistance Fund.
- Provides $100 million in FY 2027 to enhance environmental monitoring in the Commonwealth. Directs the Director of the Department of Environmental Quality to review and evaluate state environmental monitoring activities and determine where improvements can be made or are necessary. The Department of Environmental Quality may request funding from this appropriation to address critical gaps in environmental monitoring as identified in the comprehensive study. (Item 471 #2c)
- Provides $750,000 per year for regional water supply planning activities to assist with the statutory mandate to submit regional water supply plans by October 2029. (Item 366 #4c)
Transportation
- Directs the Secretary of Transportation to evaluate options for accelerating large-scale improvements to the Interstate 81 corridor. (Item 420 #4c)
- Provides $19 million in FY 2027 for one-time transit capital investments. (Item 433 #2c)
- Includes $153 million in FY 2027 for the state share of additional operating assistance for the Washington Metropolitan Area Transit Authority (WMATA) throughout the biennium. Requires WMATA to produce a 20-year, conceptual capital plan every five years beginning June 30, 2027, a funding/financial plan for major projects, and an annual report on the performance of WMATA and its capital program. Requires the Department of Rail and Public Transportation to study WMATA cost savings and cost efficiency efforts and submit a report to the General Assembly by October 15, 2026. (Item 433 #6c and Item 433 #7c)
- Directs the Virginia Department of Transportation, in collaboration with the Secretaries of Transportation and Commerce and Trade, to engage with stakeholders and recommend to the Commonwealth Transportation Board a priority project or projects to advance using the $90 million allocated for U.S. Route 220 from the Priority Transportation Fund. (Item 438 #1c)
- Provides $7 million in FY 2027 for the Route 460 Phase IIA Finish Grade Project. (Item 438 #2c)
Other Items
- Establishes a retail cannabis market, with provisions setting out tax rates, licensure requirements, and product testing and packaging requirements, among other provisions. (Item 4-14 #4c)
- Deposits $350 million in FY 2027 as a Medicaid reserve contingency in the event of higher-than-expected costs in the program. (Item 471 #1c)
- Deposits $225 million in FY 2027 to a new Federal Uncertainty Contingency Fund that may be used to address unanticipated reductions in federal funding affecting state programs and services. (Item 471 #3c)
VACo Contact: VACo Legislative Team