Hobbs proposes $17.7 billion budget centered on tax cuts

Democratic Gov. Katie Hobbs is proposing a $17.7 billion state budget focused on affordability projects, but it relies on uncertain federal reimbursements and deals with Republicans that have yet to materialize.

Tax cuts are central to this year’s budget negotiations, following the passage of H.R.1, also known as President Donald Trump’s “big beautiful bill.”

Hobbs is proposing a “middle-class tax cut package” which would amount to about $250 million. That doesn’t fully conform with the broader cuts imposed by H.R.1, nor does it match up with the Republicans’ plan, which would cost about $441 million in this fiscal year.

Hobbs’ tax cut plan is the focal point of a broader affordability agenda.

She intends to use a few million dollars of leftover federal American Rescue Plan Act dollars the state originally got for COVID-19 relief to pay for a Housing Acceleration Fund.

The office intends to use that ARPA money, combined with private investments, to leverage up to $300 million for workforce housing.

Hobbs’ second proposed housing program would also be funded by ARPA dollars, plus a new proposed tax of $3.50 on short term rentals. It would raise income eligibility to allow more Arizonans to apply for assistance with utility bills, or what’s known federally as LIHEAP.

That’s expected to expand assistance to 30,000 more residents.

That’s not including another infusion of funding to expand weatherization plans intended to make housing more efficient and ultimately lower the cost of utility bills.

Hobbs also plans to continue funding existing programs which make kids meals, child care and vehicle repairs cheaper for eligible Arizonans.

That would also include programs that provide free meals for kids. The budget includes funding for school meals grants and for the SUN Bucks program, which provides eligible families with funding for children’s meals over the summer.

One of the budget’s larger proposed expenditures is for child care. With $44.8 million, Hobbs would continue funding for the Child Care Assistance Program housed in the Department of Economic Security.

A program to help Arizonans repair vehicles that don’t pass emissions would also continue under Hobbs’ plan.

Big, beautiful budget cuts

When Trump and Congressional Republicans passed H.R. 1, they included significant cuts and other changes to Medicaid and SNAP food assistance they say will save billions of dollars.

But those changes will also cost states money.

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For instance, Hobbs’ budget includes over $60 million in new spending to hire the hundreds of employees who will be needed at state agencies to administer new work requirements and other red tape added to SNAP and Medicaid programs, including a penalty on SNAP programs with high error rates that could cost the state over $190 million.

Hobbs is also proposing tens of millions of dollars in spending to mitigate the impact of those new requirements, which the governor estimates will cause up to 190,000 Arizonans to lose medical coverage and cost hospitals billions in federal funding.

That includes over $4 million for hospitals and $3 million to help people navigate new Medicaid requirements.

How to pay for it 

Hobbs' budget identified a number of new funding sources to help pay for her priorities, including an increase in the fee paid by the gambling companies that run sports betting apps like DraftKings and FanDuel.

Currently, state law caps the fee those operators pay to the state at 10% of their revenue.

Hobbs is proposing increasing that fee to 45% for larger companies that generate at least $75 million in monthly revenue.

Slater, Hobbs spokesman, said its past time Arizona raises its fee.

“I think that we have a very reasonable and balanced budget based on, I think, some pretty reasonable assumptions about fees that we can levy on sports betting,” he said.

According to the nonpartisan Tax Foundation, Arizona’s 10% fee ranked 20th out of the 30 states and Washington, D.C., where mobile sports gambling was legal as of 2024. Iowa and Nevada has the lowest rates at 7%.

Raising the rate to 45% would give Arizona one the highest sports gambling fees in the country, trailing New Hampshire, New York, Rhode Island, Delaware, Illinois and Oregon, which all have fees around 50%.

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It’s unclear how the Republicans who control the state Legislature will react to Hobbs desire to raise that sports betting fee, which was set by the Legislature and signed into law by former Republican Gov. Doug Ducey in 2021.

Republican lawmakers have already criticized other new fees Hobbs proposed earlier this week to pay for other priorities included in her budget.

That includes the $3.50 per night levy on short-term rental stays that will be used to provide annual funding for several of the governor’s affordability initiatives, including expanding the federal utility assistance program.

Hobbs is also calling on lawmakers to adopt a new water usage fee on data centers that would be used to pay for water projects to help Arizona prepare for potential cuts to its Colorado River water allocation — another levy that some Republicans say the GOP-led Legislature is sure to reject.

“I kind of lost count of the amount of taxes and fees we're talking about adding,” Sen. T.J. Shope (R-Coolidge) said after Hobbs' state of the state speech earlier this week. “So we know those aren't going anywhere.”

The governor is also again proposing some changes to the school voucher program, though they are unlikely to pass the legislature.

This year, Hobbs is calling to bar families earning over $250,000 a year from qualifying for school voucher dollars.

That income cap would save the state around $89 million, according to the governor’s office.

But it would have to be approved by lawmakers first, and Republicans have repeatedly-blocked Democratic-back reforms during Hobbs first three years in office.

But Hobbs’ staff argue the proposal is similar to income caps at the federal level. Trump’s signature policy created a voucher-style federal tax credit, allowing eligible families to receive up to $1,700 in federal tax credits.

“We saw that they are supportive of income caps on school vouchers. And so we think that this is a pretty reasonable proposition for them to get behind,” Slater said.

The federal legislation limits eligibility to families earning up to 300% of the median income in their community, which equals about $329,000 in Phoenix.

There are points of potential agreement between Hobbs and Republicans as well.

For instance, the governor is relying on what could be a significant influx of cash from the federal government to help cover state costs. That would come from a pot of $13.5 billion included in legislation signed by Trump to reimburse states for money spent on border security and immigration enforcement.

According to the governor’s budget, Arizona would receive nearly $760 million from that fund in the next two years.

“We're not going to negotiate against ourselves and assume a lesser value,” Slater said. “We have spent over $750 million securing the border between Gov. Hobbs and (former Gov. Doug Ducey) and, you know, doing the federal government's job for it, and we expect to be paid back.”

Senate President Warren Petersen (R-Gilbert) also said that federal reimbursement could play a significant role in the budget while discussing Republican plans to cut taxes this year.

However, it’s still unclear when the feds will disburse that money and how much Arizona will get as border states fight over the limited available funding.

Texas, for instance, is already asking for $11 billion — over 80% of the available money.

According to the governor’s office, the federal government has not started the process yet to award those grants.

Both Hobbs and Republican leaders in the Legislature are lobbying the federal government to fully reimburse Arizona after the Trump administration awarded the state less than Hobbs requested from a separate fund designed to help rural hospitals cope with Medicaid cuts.

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Trimming the fat

The governor's office also believes it can save around $100 million by 2029 by improving efficiency and cutting waste out of state government.

Slater, the governor’s spokesman, said that would not include laying off current government employees, though the governor is proposing lowering the cap on the total number of employees agencies can hire.

There are also plans to invest in training state employees on artificial intelligence to help improve efficiency.

Part of the plan would call for improving the way government agencies purchase goods and hand out contracts by making sure one state agency isn’t locked into a more expensive contract for the same items than another agency.

The governor is also proposing the sale of vacant properties and leasing out other government-owned land for energy projects, such as solar power farms.

Any new solar projects on state land would still need to go through the local zoning processes, which some advocates say is the biggest hurdle facing solar developers today.

Other priorities  

The governor’s budget is also crafted around the assumption that she and lawmakers will put an extension of Proposition 123 on the ballot. The measure, last approved by voters in 2016, uses revenue from the state land trust to pay for education.

Democrats and Republicans agree on the need to continue Prop. 123, but haven’t come to a deal over the last year on what that proposal should be.

Democrats want to use the funding to pay for higher teachers’ salaries as well as other school projects. Republicans propose taking less out of the land trust and only funding teacher raises, as well as codifying private school vouchers into the state Constitution.

Last year, lawmakers had to spend about $300 million backfilling lost Prop. 123 dollars, since they didn’t put a continuation measure to voters.

The budget has some proposed funding boosts for the Department of Child Safety. The combination of $37 million in state money plus $14 million of ARPA dollars would go towards meeting caseload needs for group homes.

Separately, $4.1 million of ARPA dollars to increase foster care rates. The governor’s office projects that increased funding will not only lower the amount of children in group homes, but overall mean better outcomes for foster children.