By Howard Fischer
Capitol Media Services
PHOENIX -- Promoting it as her own idea, Gov. Katie Hobbs on Thursday said she wants Arizona lawmakers to enact many of the same tax cuts as Congress approved last year in the "Big Beautiful Bill.''
"I'm proudly working to deliver this tax cut for middle class Arizonans,'' the governor said in a press release, dubbing it "my Middle Class Tax Cuts Package.''
Only thing is, key legislative Republicans told Capitol Media Services in July, after the federal law was adopted, that there is strong sentiment among the GOP majority to ensure that Arizona's tax code conforms with the revised Internal Revenue Code -- and does so retroactively so it affects earnings in 2025.
In fact, Senate Majority Leader John Kavanagh said not conforming is not a realistic option. He said Arizonans should not have to do double calculations on everything from the standard deduction to whether Arizona, unlike the federal government, will tax their tips and overtime.
But what remains unknown is exactly how much such changes will cost -- and where the state will get the money.
The Joint Legislative Budget Committee estimated in July that conforming to every change in federal law carries a $318 million price tag, plus another $57 million in possible effects, a fair chunk for a state with a $17.6 billion state budget.
Gubernatorial press aide Christian Slater said the best estimate of Hobbs' plan is $215 million.
The difference is that the governor's proposal does not include some provisions in the federal law, like allowing businesses to write off the cost of new equipment faster, reducing their taxable income.
Kavanagh, a Fountain Hills Republican, said Thursday that he believes the Legislature will find the cash -- and not just for the parts of conformity that the governor wants. And if nothing else, he said he believes the state could cut some other lower-priority programs to make up the difference, though he did not identify what he believes is on that last,
What makes all this important -- aside from the change in state revenues -- is the hassle that not conforming would create for Arizona taxpayers.
Right now the starting point for Arizonans to compute their personal state income taxes is the federally adjusted gross income.
That simplifies the process for filers. They start with the FAGI and make additional calculations, like the ability to deduct money put into 529 Plans to save for a child's college from their income. And Arizona has dollar-for-dollar credits that don't exist on the federal form, like donations to organizations that provide scholarships for students to attend private and parochial schools.
If Arizona does not conform, however, that creates what Kavanagh calls an "accounting nightmare.'' That would require Arizonans to make additional calculations and add back income into the state form that the federal government has decided is no longer taxable, like income from tips and overtime.
Hobbs, facing a tough reelection campaign in 2026, is picking and choosing which part of the federal law she wants Arizona to follow: those she said that affect the "middle class.''
"I encourage the Legislature to join with me to immediately codify my Middle Class Tax Cuts Package to increase the standard deduction, support our seniors, and allow everyday Arizonans to benefit from tax deductions on tips, overtime, and car loan interest when paying their state taxes,'' her press release reads.
Specifics include:
- Increasing the standard deduction on state tax forms from $15,000 to $15,750 for single filers, twie that for married couples filing jointly;
- Add an additional $6,000 reduction in taxable income for Arizonans 65 and older;
- Allow Arizonans to deduct tips they have earned;
- No state income tax on eligible overtime;
- Create a deduction for the taxes paid on interest on loans on new cars made in Arizona.
And all that can add up depending on how many of those deductions a person can claim.
For example, Hobbs said a 68-year-old unmarried person who has a federal adjusted gross income who earns tips working full time at an Arizona casino who works overtime and purchased a new car in 2025.
Without conformity, the governor said, her state tax would be $1,500; with all the new deductions, that drops to $1,031.
Sen. J.D. Mesnard who chairs the Senate Finance Committee -- the one that deals with the tax code -- pointed out that the state has almost always conformed to changes in federal tax law.
"It keeps things simple for the taxpayer,'' said the Chandler Republican. "It's more transparent.''
And Mesnard, like Kavanagh, said even with the size of the hit to state revenues -- he's seen figures as high as $400 million for the whole package, including breaks to help business -- he believes conformity is "do-able.''
"We just have to prioritize,'' he said.
Slater said his boss also believes that the money can be found and a deal reached with the Republican majority to finance the lost revenues -- at least those in her priority list.
He pointed out that the Democratic governor has worked with the GOP majority and signed balanced budgets each year since she took office in 2023, though that is something actually required in the Arizona Constitution. And Slater said that occurred even in the wake of cuts in state income tax enacted during the administration of Doug Ducey, her Republican predecessor, cuts that kicked in after she took office.
"Gov. Hobbs is confident we can reach across the aisle again and deliver a fourth bipartisan budget while delivering critical tax cuts for middle class Arizonans,'' Slater said.
That talk by Hobbs about bipartisan cooperation yet trying to make a conformity plan all about her drew a swat from Mesnard. He pointed out all this actually started in Washington with the "Big Beautiful Bill.''
"The governor is trying to steal credit for efforts by President and the Republican Congress,'' he said, a bill "that every single Democrat voted against.''
Hobbs, who won her 2022 race by just 17,117 votes out of more than 2.6 million votes cast, is trying to hold onto her seat.
Her most recent campaign finance reports showed she already had collected $9.3 million since the 2022 race, plus another $2.7 million in a separate political action committee. In her first race in 2022 she raised less than $15 million.
And while polls a year out from the election may not carry much weight, they do suggest that the incumbent Democrat may have something to fear, especially with Republicans increasing their voter registration edge in Arizona.
A Gray House poll conducted last month showed her trailing a "generic Republican'' by four points. And a more recent poll by Emerson College pitting her against GOP front-runner Andy Biggs had the incumbent leading by just one point, well within the margin of error.
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