In State of State address, Hobbs prioritizes affordability, calls for tax breaks. GOP wants more

Entering the final year of her first term in office, Democratic Gov. Katie Hobbs called on state lawmakers to adopt a series of tax cuts that she says will benefit middle-class Arizonans. But those cuts don’t go far enough for the Republicans who control the state Legislature.

Hobbs said her proposal includes some of the tax breaks included in President Donald Trump’s so-called Big Beautiful Bill that Congress passed over the summer, including an increase in the standard deduction and no taxes on tipped wages.

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“We can put more money in the pockets of Arizona families — money that will help them put food on the table, care for their children, and pay their utility bills,” Hobbs said during her annual State of the State address before a joint session at the Arizona Legislature.

The Republicans who control both chambers at the state Legislature have introduced their own proposal to fully adopt the federal tax cuts, including allowing businesses to write off costs for new equipment more quickly.

They argue Hobbs, not Republicans, put forward a plan with tax cuts for the wealthy.

“It is a tax cut for the working class,” said Sen. T.J. Shope (R-Coolidge), saying Hobbs' plan would allow Arizonans to deduct state and local taxes they paid from their tax burden.

“Which we view as just a giveaway to millionaires and billionaires, to borrow a phrase from the governor,” Shope said.

Legislative budget analysts predict the GOP plan will cost the state $343 million next year and over $1 billion over the next three years.

Hobbs' proposal, by comparison, would cost about $252 million next year, analysts predict, by leaving out proposals the governor argues will disproportionately benefit corporations and wealthier Arizonans.

The governor has said she is open to negotiating with Republicans to adopt additional cuts, but has indicated she wants those negotiations to take place as part of larger budget discussions after lawmakers pass her proposal.

“If you think billionaires and big corporations should get a tax break before hardworking families — then you need to spend more time with real Arizonans who are struggling to get by,” Hobbs said in her speech.

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The cost

Both the Hobbs and Republican plans will cut state tax revenues, which are used to fund many of the agencies, programs and services that Arizonans rely on.

And how exactly the state will reduce spending on those agencies and programs to accommodate the cuts looks to be an early point of contention heading into negotiations.

Hobbs has already vowed to veto any Republican tax cut package passed without negotiations over how the state will pay for those cuts.

Republicans plan to fast-track their tax cut package and send it to Hobbs by Thursday.

“I think she'd be wise to sign it and get that issue off the table,” Shope said.

Democratic lawmakers say they are in lockstep with Hobbs and want to pass her tax cut package and other priorities quickly.

“If you put that bill on the floor, it should get, I would say, super majority support,” House Minority Leader Oscar De Los Santos (D-Laveen) said. “There's no reason to delay it other than Republicans wanting to hold middle-class families hostage in order to provide tax breaks for billionaires and corporations.”

But Democrats also acknowledged adopting tax cuts of any level will make it more difficult for the state to fund their priorities, from public education to social services, as signs indicate the economy and job market is softening.

“So I think we are rightly concerned about what revenue numbers look like, and we need to make sure that any proposal is sound,” Senate Minority Leader Priya Sundareshan (D-Tucson) said.

Hobbs' office has not released its plans to pay for her more modest plan, though the governor said those details will be included in her budget proposal released later this week.

In her speech, she did promise to adopt “a series of cost savings measures” that she claims will save the state up to $100 million over the next three years, a fraction of the cost of her tax cut plan.

“We will not slash and burn with stunts that do more harm than good,” Hobbs said. “We will not decimate important services that families and businesses rely on. We will streamline, consolidate, and cut costs to make government work for our people.”

Hobbs and Democrats are also once again calling for reforms to the state’s school voucher program, which now covers nearly 100,000 students and costs around $1 billion annually.

They argue reigning in private school vouchers, also called Empowerment Scholarship Accounts, will save the state money by combatting waste and fraud, citing reports of spending on non-education items and fraud cases prosecuted by the Arizona Attorney General’s Office.

“Over the past several months, we have seen ESA voucher money spent on diamond rings, luxury ski trips, and I kid you not, lingerie,” De Los Santos said. “That is a disgrace. It is a slap in the face to every taxpaying Arizonan, and we're going to crack down on that waste, fraud and abuse.”

But Republican lawmakers have largely opposed any effort to reform the voucher program since they expanded it to cover all students in the state in 2022.

“I think this is the fourth consecutive year of some sort of ESA discussion that she knows is not going anywhere,” Shope said.

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Affordability

Hobbs and Democrats say her tax cuts are part of a larger plan to improve affordability for Arizonans struggling with high cost of living.

The governor proposed several other new initiatives as a part of that plan, including programs that would make it easier for developers to build affordable housing and expand federal programs that help Arizonans pay utility bills and lower their energy costs.

Rather than pull from existing state revenues to pay for those programs, the governor is relying on a mix of public and private funds, as well as new fees.

That includes a proposed $3.50 per night fee on short-term rentals that will help pay to expand eligibility for existing federal assistance programs.

That measure is likely to face stiff opposition from the short-term rental industry.

“This proposal is a new tax on over 1.2 million Arizonans who stayed in a short-term rental in Arizona last year,” Lauren Bouton, an executive with Airbnb, said in a statement.

She argued the new fee will make travel more expensive and harm Arizonans who earn money by renting out their properties.

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Other priorities

In her speech, Hobbs also outlined plans to address Arizona’s water needs as the state faces likely cuts to how much water it gets from the Colorado River.

That includes announcing the creation of a new Active Management Area, also called an AMA, for the Ranegras Plain Basin in La Paz County. An AMA is a designated area in the state where groundwater use is strictly regulated.

GOP and Democratic lawmakers agree that rural areas should have an alternative to AMAs, which were designed for urban areas, but they haven’t been able to come to a bipartisan agreement.

In the Ranegras Plain Basin, groundwater levels are severely depleted.

“We can no longer sit idly by while our rural communities go without help. They deserve solutions and security, not another decade of inaction and uncertainty,” Hobbs said.

The governor also proposed a new fee on data centers to account for their water usage. Proceeds from the fee, which would be set by the director of the state department of water resources, would go into a fund to prepare Arizona to adjust to anticipated Colorado River cuts.

“If data centers were to pay the same amount, we could make a multi-million dollar deposit into the Colorado River Protection Fund every single year,” she said.

Hobbs said her budget proposal will also include a $30 million deposit into the fund.