By Howard Fischer
Capitol Media Services
PHOENIX -- The end appears near for tax breaks to build data centers in Arizona.
Gov. Katie Hobbs told Capitol Media Services she sees no need for the incentives that allow the often-controversial developments to get exemptions from state and local sales taxes for the equipment they buy.
Hobbs actually voted for them as a state legislator when they were first approved in 2013, albeit as part of a larger budget proposal. But things, she said, are different now.
"The incentives have done their job,'' Hobbs said in an extensive interview.
"We are the Top Two market in the world for data centers right now,'' she said. "And it is time for us to strike the right balance.''
The governor will make her position official on Monday when she gives her State of the State speech as lawmakers return to the Capitol.
But it's only part of what Hobbs, who is in the last year of her term and faces a tough reelection effort, is expected to say.
Another priority she will announce Monday includes establishing a bond fund that could help creation of upward of $300 million in affordable housing.
And Hobbs wants to impose a $3.50 a night tax on "vacation rentals,'' with the proceeds used to subsidize the cost of utilities for those on limited incomes. But she won't say whether she supports more comprehensive proposals to allow cities to outlaw them entirely or place limits on how many can be located there.
Hobbs also will make a big push for what she calls her "middle class tax cut program,'' taking some of the tax cuts approved by Congress in the "Big Beautiful Bill'' and applying them at the state level. These includes a higher standard deduction and an exemption from state income taxes for tips and overtime.
The governor, however, already is teeing up what is expected to be her first of many vetoes this session, saying she will reject a broader plan pushed by Republicans to enact other parts of HR 1 that are designed to provide tax relief for businesses and some higher-income Arizonans.
But her support for killing the incentives could provide a bit of what might be rare bipartisan cooperation in this election year. In fact, the governor noted that a bill to do exactly what she wants already has been introduced -- by a San Tan Valley Republican.
That 2013 law law permits the Arizona Commerce Authority to certify new data centers for the tax breaks. So popular were they until recently that lawmakers actually voted in 2023 to extend those credits through 2033.
The proposal by Rep. Neal Carter would pull the plug on new applications at the end of the year.
He said it's what his constituents want.
"They think they're ugly,'' he told Capitol Media Services. "They think they use a lot of water.''
Nothing in Carter's bill -- and nothing in what the governor wants -- would place a legal barrier in the path of any company that wants to build a data center in Arizona. What it would do is simply eliminate the financial incentive for that to happen.
"It's a bad way to do public policy,'' Carter said, providing special breaks for some that he believes end up increasing the tax burdens on everyone else.
Hobbs agrees.
"We don't need to incentivize them anymore,'' she said.
"They're here,'' the governor said. "And I don't think the taxpayers should be subsidizing them
There's another bipartisan angle to all this. U.S. Rep. Andy Biggs, who also voted for the original 2013 bill when he was a state senator, said he, too, supports what Carter want to do.
What makes that especially significant is Biggs is running to be the Republican nominee for governor to take on Hobbs in her reelection campaign this year.
In some ways, the newfound second thoughts about data centers by elected officials -- just three years after lawmakers renewed the law -- reflect rising public opposition.
Hobbs noted that the Tucson city council in August rejected a $3.6 billion "Project Blue'' data center amid concerns about both high water use as well as whether it will strain local power grids. That, however, hasn't halted the project, which is now being considered for placement outside the city limits with an agreement with Tucson Electric Power to supply it.
And she also cited the unanimous decision of the Chandler city council a month ago to refuse to rezone property there for a data center.
There's another benefit to putting a kibosh on new benefits.
The Department of Revenue estimates that the incentives lose the state about $38 million a year.
"We're facing a challenging budget year,'' Hobbs said. "So any way we can help free up revenue is going to matter.''
There is one thing in the governor's proposal that is not in Carter's legislation.
She wants a penny-a-gallon fee on the water used by data centers, with the estimated $6.5 million that would be raised each year to fund waster conservation and recycling efforts.
But Hobbs, in her wide-ranging interview, also said there are limits to how far she expects to go in bipartisan cooperation.
With 2026 an election year, Republicans are crafting measures that, based on the governor's prior statements and actions, are virtually certain to draw a veto.
That would hardly be a surprise.
Hobbs actually set a new record for vetoes last session at 174. That means she rejected four out of every 10 bills sent to her.
The governor was unapologetic.
"I'm going to be a backstop against the attacks on our freedoms, against the ridiculousness,'' Hobbs said.
And Hobbs already is sending out a warning to the GOP majority not to approve measure they know she won't sign.
"Certainly, if they're sending stuff they know I'm going to veto just to trigger a veto, it's a little disingenuous,'' the governor said. "It's a political stunt.''
But there's more involved politically.
Republicans already are making plans to send directly to voters some of the bills that the governor already has vetoed and others she is expected to reject this year. And that would put those issues -- and the governor's action -- on the same November ballot where she is seeking reelection.
And some may have more public support than the governor is willing to concede.
One of those is a high-profile issue of whether those who were born as biological boys should be able to play on girls' teams.
That has drawn national headlines in some cases. But Hobbs said that shouldn't require a new state law.
"They are creating political issues out of things that have to do with individuals and their personal freedom and safety and affect a few people,'' Hobbs said. "If they want to send that to voters, that's their prerogative.''
But there's another hot-button issue that affects even more people than sports: Whether boys should be able to use locker rooms and restrooms that are marked for girls only. Hobbs, who has vetoed this measure several times, said she sees no reason for voter intervention and creating a statewide law.
"Why can't we just have unisex bathrooms,'' she said.
In fact, that actually was part of legislation proposed by Sen. John Kavanagh that Hobbs vetoed. He would require schools to have a single-occupant restroom for students who did not want to use the one linked to the gender they were assigned at birth.
Hobbs, however, said she still doesn't see a need for statewide legislation.
"Let the schools figure this out,'' the governor explained. "We should not be making this a political issue.''
Hobbs said she's not willing to guess whether she will break her own record this session.
"I know there is a record number of bills being filed right now,'' she said. "And I have never been good at the prediction business.''
And there are plenty of measures already filed that could provoke a veto, like a plan to alter the deadline for those who get their ballots by mail to return them to polling locations.
Others that could get a veto stamp include:
- Exempting anyone younger than 25 from state income taxes -- but only if they're married and the spouse also is under 25;
- Raising speed limits on rural highways, including a test of no speed limits along a stretch of Interstate 8;
- New reporting requirements on abortions;
- Allowing people to make payments to the state with cybercurrency;
- Requiring public schools to let students in private schools to join their sports teams;
- Various restrictions on gender-reassignment procedures;
- Stiffer requirements to collect unemployment benefits.
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