Hobbs defends proposal to cut personal income taxes by more than $200M

Gov. Katie Hobbs is defending her plan to cut more than $200 million in personal income taxes — even as Arizona faces a shaky financial future.

On Monday, Hobbs said the state is facing a challenging budget, and her own budget director warned Arizona faces a cliff in federal funding. Still, Hobbs says tax relief is necessary.

“I hear over and over again ‘things are unaffordable’ and this is making it easier on them. And I think we owe it to them to deliver that," Hobbs said.

Hobbs did not say which services might be cut to make up for the lost revenue.

She promised to unveil those details when she releases her budget in January.

Still, Hobbs admitted she does have one program in her financial sites: Curbing the system of universal vouchers that provides taxpayer dollars — an average of $7,400 a year — to attend private and parochial schools.

The Democratic governor has attempted every year since taking office in 2023 to cut back the program. When outright repeal failed, she tried last year to impose income limits, eliminating vouchers for families who earn more than $200,000, something she claimed would save $150 million a year.

That didn't even get a vote.

"It doesn't mean that we give up the fight,'' Hobbs said. And she contends that news reports about the program, ranging from questionable purchases made by parents of home-schooled children to the fact there are no income limits, will bring the public around.

"Nobody intended for our education dollars to be spent this way,'' Hobbs said, with the cost of vouchers, known as Empowerment Scholarship Accounts, now approaching $1 billion.

But House Speaker Steve Montenegro said any such plan remains a non-starter.

"House Republicans remain focused on strengthening the program and protecting parents' rights to guide their children's education,'' the Goodyear Republican said. "Parental choice will not be reduced on our watch.''

There is Republican support for what's in the governor's program which is a partial carbon copy of what Congress approved earlier this year: Larger standard deduction for those who don't itemize, an additional $6,000 reduction in taxable income for Arizonans 65 and older, and no tax on tips or overtime.

But GOP lawmakers also want the things in the "Big Beautiful Bill'' incorporated into the Arizona tax code, things that Hobbs has not included. That includes allowing businesses to write off the cost of new equipment faster to reduce their taxable income and a big tax break for the most wealthy Arizonans who itemize their taxes.

All that carries an estimated $337 million price tag according to legislative budget analysts; just the part Hobbs wants would cut state revenues by about $215 million.

Here, too, Montenegro said Hobbs is wrong to pick and choose which parts of the federal law the state should incorporate into the Arizona tax code.

"Gov. Hobbs' insistence to tax items the federal government leaves untaxed would raised everyday costs and drive employers elsewhere,'' he said. Instead, Montenegro said, the Republican-controlled Legislature will send her "a responsible conformity bill that gives taxpayers the certainty and relief the need.''

Whatever happens needs to happen soon.

GOP lawmakers have asked the governor to convene a special session for Jan. 19, to run concurrent to the regular session that starts the same day.