Arizona faces full federal tax conformity and a moratorium on data center tax cuts | Arizona Capitol Times

Key points:

• Legislature to send Gov. Katie Hobbs a bipartisan budget deal

• Governor anticipated to sign, lawmakers expect to adjourn for summer on Friday

• The $18.3 billion deal fully conforms Arizona to President Donald Trump’s federal tax cuts and pauses subsidies for new data centers for three years 

Gov. Katie Hobbs is expected to sign a bipartisan budget package now moving through the Legislature, calling the deal a compromise with legislative Republicans after including full conformity to President Donald Trump’s tax cuts and a three-year pause on subsidizing taxes for new data centers. 

The Joint Appropriations Committee passed the $18.3 billion package on Wednesday morning with only three lawmakers on the 28-member panel voting against it. Both chambers are expecting to vote on the budget package Thursday and adjourn sine die on Friday. 

Hobbs in May vetoed a $17.9 billion GOP-led budget proposal that kept the state’s sales tax exemption for data centers, but lawmakers and the Governor’s Office have reached an agreement after a month-long recess to focus on budget negotiations. 

“This bipartisan compromise shows what we can do when we put common sense before political games and focus on delivering real results for our communities,” Hobbs said on Tuesday. “It will put money back in the pockets of Arizona families and lower costs, make our communities safer and protect the vital services that Arizonans rely on.”

Republicans were primarily seeking to become the only state that fully conforms to the federal tax policy in last year’s One Big Beautiful Bill Act, H.R. 1. Full tax conformity is expected to reduce state revenue by over $1.4 billion over four years. While Democrats have largely opposed full tax conformity, Hobbs has supported “middle class tax cuts” that are also implemented in the budget, which includes the elimination of taxes on tips and overtime, an increased standard deduction and a new $6,000 tax deduction for seniors. 

“This is a $1.4 billion tax cut budget,” said House Appropriations Committee Chairman Rep. David Livingston, R-Peoria. “It’s all that matters in this budget. Everything else is small potatoes.”

Hobbs had proposed some revenue sources of her own in her $18.7 billion budget proposal released in January. Those were kept out of the bipartisan deal, including a short-term rental $3.50 nightly fee and a sports betting fee that was expected to generate $146 million in revenue. The state’s Empowerment Scholarship Account program is also untouched after Hobbs asked for an income cap on the program earlier this session. 

“Arizona families will keep more of what they earn. Parents will keep school choice. Public safety will be funded. Government will be smaller. Welfare programs will be held to basic standards, and Governor Hobbs’ push for higher taxes and bigger government was stopped,” said House Speaker Steve Montenegro, R-Goodyear.

But Hobbs and Democrats did get the pause on tax breaks for new data centers, which lawmakers believe will save about $38 million annually. House Minority Leader Oscar De Los Santos, D-Laveen, said Arizona’s three-year moratorium on data center subsidies will be the longest of any state in the country.  

House and Senate Democrats are touting other wins in food assistance and public education support after a near 50% cut to the enrollment of the Supplemental Nutrition Assistance Program since last year. The budget funds free school meals for two years and allocates $235 million for food assistance programs and $66 million that will help public schools acquire textbooks, technology and transportation. 

“We’re also using the money from stopping the data center tax giveaway to invest in food security and affordability,” De Los Santos said on Wednesday. 

And as Democrats secured money for those programs, Republicans got reforms to Medicaid and SNAP to include more strict eligibility and residency requirements for both programs as lawmakers are trying to reduce the state’s error rates to comply with federal requirements. 

“The reforms that we secured in this budget are going to drive down those error rates,” said Rep. Matt Gress, R-Phoenix. 

The only Republican who voted against the budget package on the joint committee, which included almost a third of the Legislature’s 90 members, was Rep. Justin Olson, R-Mesa. 

While Olson supports full tax conformity and the budget’s taxation omnibus bill, House Bill 4168, he said he couldn’t support the mass motion or the other budget bills with how much the state planned to spend.

Republican leaders at the Legislature do consider this year’s budget spending growth to be a win relative to previous years. The budget has grown by 3.1% compared to last year, below the 3.9% combined change in Arizona’s population and inflation.

“I’m pleased that it increases much smaller than the amount that we increased the budget by last year, but I’m still very uncomfortable with a $716 million increase in state spending on top of the more than double the increase in population and inflation that was adopted last year,” Olson said.

Two Democrats, Sens. Mitzi Epstein D-Tempe and Lauren Kuby, D-Tempe, also voted against the budget in the appropriations hearing. Epstein did not support the tax conformity provisions in the budget, although she commended Democratic leaders for reaching a more favorable deal than the Republican budget presented earlier in the session. 

The GOP budget proposed cutting state agencies across the board by 10%, but that has now been reduced to a 2.5% reduction in operation spending which eliminates 1,000 unfunded full-time positions and requires the sale of vacant government buildings. The bipartisan budget also increases state employee healthcare spending by about $100 million and removes a 20% increase in premium payments that was in the GOP budget. 

Under the earlier budget, about 40,000 Arizonans would have been removed from the state’s Medicaid program, the Arizona Health Care Cost Containment System, but Democrats negotiated $20 million for 163 new full-time employees at AHCCCS and the Department of Economic Security to help administer the programs.

“House Democrats stuck together and forced a better deal: one that feeds kids, supports public schools, lowers childcare costs, and protects healthcare,” Assistant House Minority Leader Nancy Gutierrez, D-Tucson, said in a Tuesday statement. 

The budget deal also includes a 4% stipend for correctional officers, $48 million to state childcare assistance programs, and $58 million for child safety operations.