April Legislative Update

On May 5, Governor Katie Hobbs vetoed a Republican-backed $17.9 billion state budget, calling it “unbalanced and reckless.” The proposal, passed along party-line votes by the Republican-controlled Arizona Legislature, reflected major GOP priorities on taxes and spending cuts but immediately triggered conflict with Hobbs. 

The Republican budget proposed spending roughly $800 million less than Hobbs’ own January budget plan. A central feature was conformity with federal tax changes passed under President Donald Trump’s “One Big Beautiful Bill Act.” In  addition to the $1.4 billion in tax reductions listed below, conformity with federal tax law reduces the complexity of filing state and federal taxes. Without conformity the time and expense of preparing state tax returns would increase substantially. 

·  Full or near-full conformity with the federal “One Big Beautiful Bill Act” — Arizona would adopt most federal income tax changes passed under President Donald Trump, reducing state revenues by an estimated $1.1–$1.45 billion over several years. 

·  Expanded standard deduction — The package aligned Arizona with higher federal standard deductions, lowering taxable income for many filers. 

·  Tax deductions for tipped income — Workers earning tips would be allowed to deduct qualifying tip income from Arizona taxes. 

·  Tax deductions for overtime pay — Eligible overtime earnings would become deductible from state taxable income. 

·  Additional senior deduction — Seniors age 65 and older would receive an additional $6,000 tax deduction. 

·  Expanded child tax credit benefits — The proposal reflected federal changes increasing child tax credit amounts. 

·  Business tax conformity provisions — Arizona businesses would receive state-level conformity with new federal business deductions and depreciation rules, benefiting corporations and some large investors. Critics said these provisions especially favored data centers and large companies. 

·  Overall income-tax reduction package — Republican leaders said the combined package would return roughly $1.4 billion to taxpayers over four years through lower taxes and conformity changes.

To close the budget shortfall the GOP proposal included broad spending reductions. Most state agencies would face 5% budget cuts, though agencies related to public safety, corrections, and child welfare were exempt. 

The plan also targeted several social programs. It proposed reductions to Medicaid and nutrition assistance programs, changes that opponents said could remove health coverage and food support from vulnerable residents. State employees would also see a 10% increase in health insurance premiums under the proposal. Republicans framed the changes as fiscal discipline, while Hobbs described them as balancing the budget “on the backs of working families.” 

Another major dispute involved education funding. The Republican budget did not renew Proposition 123, a voter-approved education funding measure that expired in 2025 and had provided hundreds of millions of dollars annually to schools. Hobbs had previously halted budget negotiations over Republicans’ refusal to include discussions about extending the program. 

The veto leaves Arizona without a finalized state budget as lawmakers continue negotiations ahead of the June 30 deadline.  As has been the case in recent years, we are likely to walk right up the deadline before reaching an agreement.

Brian Tassinari