Tax cuts, affordability and data centers highlight Gov. Katie Hobbs’ agenda entering the final year of her first term in office as she prepares for a contentious reelection campaign.
The governor and Legislature are tasked with passing a state budget every year, a process that has become increasingly contentious during Hobbs’ first three years in office as she negotiated with the Republicans who run the Legislature.
Both sides have had to deal with a succession of budget crises, from a massive budget deficit in 2024 to the near-bankruptcy last year of the agency that supports residents with developmental disabilities.
This year, that budget process will also be complicated by changes at the federal level included in President Donald Trump’s so-called Big Beautiful bill, which shifted some social safety net spending onto states and also included a broad array of tax cuts.
Last month, Hobbs said she wanted lawmakers to adopt some of those tax cuts at the state level, specifically the changes she thinks will benefit middle-class Arizonans, like an increase in the standard deduction.
“I think what my priority, obviously from my previous executive order, is making sure that middle-class Arizonans, when they go to file their taxes at any time now, that they get the benefits of that increased standard deduction and other tax benefits,” Hobbs said.
Hobbs already issued an executive order to begin the process to implement those cuts while leaving out other federal changes that she believes will disproportionately benefit wealthier residents and corporations.
But Republicans argue she jumped the gun by signing an executive order before lawmakers have had a chance to weigh in.
“The governor jumped ahead of the law by issuing state tax guidance this week that assumes legislative action — which hasn't happened yet — and her recent executive order only deepens confusion. This kind of unilateral overreach undermines the process and leaves families, tax preparers, and businesses stuck in the middle,” House Speaker Steve Montenegro (R-Goodyear) said in a press release.
Montenegro and other Republican lawmakers want Arizona to fully adopt all the tax breaks passed at the federal level earlier this year. That includes items left out of Hobbs’ proposal like allowing businesses to write off costs for new equipment more quickly.
Sen. J.D. Mesnard (R-Chandler), who is sponsoring legislation to adopt the full slate of tax breaks in Arizona, said Republicans are committed to moving quickly.
“In particular, the plan helps working families struggling with higher prices by increasing Arizona's child tax credit and creating a deduction for childcare expenses. We're committed to moving quickly so Arizonans can realize a larger refund without delay this tax filing season,” he said.
Hobbs also said she wants lawmakers to act quickly to adopt the tax breaks she is backing, saying she wants that to be the first bill sent to her desk this year.
Once that happens, she said she is open to negotiating with Republicans to pass the full slate of tax breaks.
“The Republicans have made it clear that they want full conformity, and so expect it to be a part of negotiation,” Hobbs said.
Neither Hobbs nor Republicans have revealed how they plan to pay for their tax cut proposals, which will eat into the state’s revenues, or the money it uses to fund state agencies and programs relied on Arizonans.
According to legislative budget analysts, Hobbs’ limited plan would cost the state around $252 million next year. The full tax cut plan backed by Republicans would cost around $343 million.
Hobbs said her plan to pay for the cuts will be included in a proposed state budget released next week.
Affordability
With those budget realities in mind, Hobbs is proposing a series of new streams to pay for assistance programs and affordable housing.
That includes a $3.50 nightly fee on short-term rentals.
That money would then be used to expand federally-funded programs that help low-income Arizonans weatherize their homes and pay utility bills.
Currently, Arizonans who make up to 60% of the state’s median income qualify for that utility assistance, which equates to just under $65,000 for a family of four. Hobbs’ plan would expand eligibility to people earning up to 100% of the state’s median income, or nearly $108,000 for a family of four.
“Basically expanding the people eligible for the federal utility assistance that the state gets, which we've continued to argue is disproportionately low in Arizona, given our harsh climate in the summer,” Hobbs said.
Hobbs is also calling for the creation of a program to boost the state’s supply of affordable housing in partnership with private developers.
Under the plan, the state would create what’s called a pooled bond fund.
“Essentially it gives affordable housing developers a better interest rate so they can build more housing more cheaply, and I don't mean cheaper housing, I mean with a cheaper interest rate,” she said.
According to the governor’s office, each dollar invested in the fund can create $10 of capital lended for a project.
Hobbs said the state will “kick start” the fund with a $2.5 million investment.
“We have already talked to private sector partners that want to participate,” Hobbs said, though she declined to name those potential partners.
Data centers
Hobbs is also proposing changes to how the state attracts and manages its data center industry.
That includes a new fee for data centers, specifically their water usage.
As the industry continues to grow in Arizona, that usage has become a point of contention for critics, who have called on local leaders and state regulators to reject large new data centers that can use anywhere from tens of thousands to millions of gallons of water per day.
Under Hobbs' plan, data centers would pay a per gallon fee on all water they use. The exact size of that fee would be set by the director of the Arizona Department of Water Resources, Hobbs said.
Proceeds from the new fee would be deposited into a new Colorado River Protection fund, which Hobbs says will be used to help the state prepare for impending cuts to its Colorado River allocation that will likely be included in a yet-to-be-determined deal between Upper and Lower Basin states.
“I don't want to make it sound like we're not doing any, but we need to do more and this fund will help support some of those efforts, whether it's improving infrastructure or just providing what needs to happen for conservation,” Hobbs said.
Hobbs is also calling for lawmakers to get rid of a decade-old tax incentive for data centers that was originally pitched as a way to attract the growing industry to Arizona.
The original legislation, passed in 2013, allowed qualified data centers to receive transaction privilege tax and use tax exemptions for up to 10 years. The program was set to expire in 2033.
According to the governor’s office, the incentive costs the state $38.5 million.
Hobbs said the incentive is no longer necessary.
“We are a top two market in the world for data centers, and so I don't know that we need to be subsidizing them, that Arizona taxpayers need to be subsidizing them,” Hobbs said.
Arizona is now home to the second-largest established data center industry in the world, according to commercial real estate firm Cushman and Wakefield.
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