By Howard Fischer
Capitol Media Services
PHOENIX -- Gov. Katie Hobbs and key Republicans have agreed to a nearly $18.3 billion spending plan.
The package, being presented to lawmakers this week, preserves the approximately $450 million a year in tax cuts proposed by GOP lawmakers that mirror what Congress approved last year in its "Big Beautiful Bill.''
That includes not just what Hobbs said she was willing to accept -- mainly an increase in the standard deduction for those who do not itemize on their state income tax forms, as well as no taxes on tips and overtime. But the governor also had to swallow other provisions sought by Republicans that conform state tax laws to the federal statutes, including what she called "hundreds of millions of dollars in tax breaks to special interests'' including for business and the wealthy.
But while having to accept larger tax cuts than she wanted, Hobbs also had to give up on her plans to raise various taxes and fees to fund the $18.7 billion budget she proposed in January, a plan that would have funded various new and expanded programs.
Still, Senate Minority Leader Priya Sundareshan said what finally emerged is far better than what Republicans proposed when they released their own $17.9 billion spending plan that made sharp across-the-board cuts to most state agencies and eliminated about $100 million in funds for economic development -- a plan that Hobbs vetoed in May.
That sent negotiators back to the table.
"This budget reflects the work of our Democratic caucuses to make it better,'' said the Tucson Democrat.
"It's won't be perfect,'' she said. But she said that, at the very least, it will protect state agencies from the 5% across-the-board spending cuts that the GOP had proposed, replacing that with a more manageable 2.5% reduction.
House Speaker Steve Montenegro had his own take.
On one hand, it wasn't the deal Republicans adopted by themselves. But he said it still is a victory.
"Republicans came into this session focused on affordability, responsible spending. public safety, school choice, and protecting taxpayers from new taxes and fees,'' said the Goodyear Republican. "This agreement reflects those priorities and shows what can be achieved through serious negotiations in divided government.''
And Senate Majority Leader John Kavanagh said the full conformity with the federal tax cuts -- cutting about $1.45 billion over three years in state revenues -- cannot be overstated.
"No other state has done that,'' he said.
Among key provisions of the deal set for a vote this week are:
- Keeping alive Tucson's Rio Nuevo program which diverts state sales taxes raised in the district for economic development. That came over the objections of Republicans who Kavanagh said believe it is "kind of a scam.'' But there will be some new requirements to spend a certain percentage of the dollars on projects that actually generate more tax revenues.
- Curbing and, in some cases, entirely eliminating various tax credits for businesses for things like hiring new employees, buying pollution control equipment, and doing research and development. Kavanagh said the majority of Republicans "believe in just lowering taxes for everybody and not just picking certain industries as people.''
- Removing income restrictions from an existing program that gives disabled veterans a break on property taxes.
- Imposing new requirements for those who are enrolled in Medicaid and food stamp programs. These will require recipients to have their eligibility redetermined more often and mandate that agencies cross check their qualifications with other state and federal sources.
The big win for Republicans -- beyond the tax cuts that mirror the Big Beautiful Bill -- is the ability to bring state spending under control.
In the last decade, budgets have grown an average of 5.4%. By contrast, inflation and population growth averaged just 4.4%.
By contrast, Republicans say that the new budget is just as 3.1% year-over-year increase, slower than the 3.9% change in inflation and population.
And all that is because GOP lawmakers, having gotten their way with a major tax cut and refusing to agree to the governor's plan to raise revenues elsewhere, limited the amount of new dollars available. And that meant there was no way for Hobbs to finance her 4.8% year-over-year increase in state spending and all the new and expanded programs she wanted.
The biggest of these revenue enhancements in the governor's budget was Hobbs counting on the Trump administration giving Arizona $760 million she said the federal government owes Arizona in border-related expenses during the Biden area. Those dollars never appeared.
She also proposed saving $80 million by putting an income cap on families who want to get vouchers of state tax dollars to send their children to private and parochial schools as well as home school. That was a non-starter in the Republican-controlled legislature.
And the governor also asked for $146 million in new fees on legal sports betting and even a $3.50-a-night levy on short-term rentals. Both were rejected.
But Democrats did get a partial victory.
Hobbs had asked lawmakers to repeal tax breaks to convince companies to build new data centers in Arizona. The governor said the incentives, first implemented in 2013 -- she voted for them as a legislator -- "have done their job.''
Lawmakers were unwilling to scrap the incentives. But the package includes a three-year moratorium on new incentives, a move that should save about $57 million over that period.
House Minority Leader Oscar De Los Santos said that saves enough to provide funding for critically needed programs.
"We're funding free school meals for not one but two years,'' said the Laveen Democrat. "We're investing $5 million for the Area Agency on Aging for vulnerable seniors.''
There's also $3 million for civil legal aid for money for eviction prevention and more dollars for food banks "to deliver millions of pounds of food to hardworking Arizonans who are struggling in the Trump economy.
And there's $4 million for "critical access hospitals'' that lost funding because of the Big Beautiful Bill.
And Sundareshan said Democrats believe there is enough in the budget package to protect existing services to the needy, especially with what she said are funding cuts enacted by Republicans in Congress.
"That's really the big win for us,'' she said.
And De Los Santos said that the final package leaves intact state tax breaks for renewable energy, including rooftop solar.
Still, some of the governor's priorities are just not going to get funded.
Hobbs did not get a separate request for a penny-a-gallon tax on water used by data centers. The governor projected that could raise about $6.5 million annually for the Colorado River Protection Fund to boost local water conservation and recycling efforts.
And the lower revenue projections also mean that some of the governor's plans for new or expanded projects are not going to be funded, like to help people weatherize their homes or assist with utility bill payments.
One thing that is not part of the deal is asking voters if they are willing to renew Proposition 123.
The measure, approved in 2016, took about $300 million a year from a special education trust account and used it to boost funding for K-12 education. But that authorization expired last year.
Hobbs had proposed putting it on the ballot, dividing up the new revenues among salaries for teachers and other staff, safety and security improvements, as well as other general education expenses.
Some Republicans had instead line up behind an alternate plan to divert all the revenues to salaries, but only for teachers, something they said could generate $4,000 across-the-board raises.
But talks stalled when whole plan got stuck in election year politics, with Sen. Jake Hoffman, R-Queen Creek, who chairs the Arizona Freedom Caucus, saying he did not want to hand Hobbs a victory as she was seeking reelection.
And there was another problem.
Some Republicans wanted to link the renewal to inserting provisions into the Arizona Constitution to guarantee the right of individuals to get vouchers. That would protect what are known as Education Scholarship Accounts from efforts to alter or repeal them, not only with what Hobbs had proposed but against two initiatives being circulated that would put restrictions on how the dollars could be spent.
In the end, however, there was no agreement on the best way to link the issues of K-12 funding and vouchers. So the plan was shelved, perhaps until next year.
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