The Republican-backed budget moving through the state Legislature would increase the standard deduction, boost tax credits for families and make a host of other changes that could impact Arizonans’ tax burdens next year.
The GOP budget would modify state law to adopt all of the cuts added to the federal tax code by President Donald Trump and congressional Republicans in 2025, with some small modifications over the next few years.
Standard deduction
The most impactful change is an increase in the standard deduction for Arizona tax filers.
Since Trump’s last tax cut package in 2017 raised the standard deduction, nearly all Americans use that standard deduction to calculate their tax burden rather than claiming itemized deductions.
It’s unclear exactly how many Arizonans use the standard deduction every year, but nationwide, 91% of taxpayers opted to take that route, according to the Tax Policy Center.
That’s up from around two-thirds of taxpayers before 2017, according to the Bipartisan Policy Center.
Though Republicans and Democratic Gov. Katie Hobbs are currently sparring over the budget, they both agree that the state should increase the standard deduction.
Tax cuts for business and data centers
The governor previously proposed adopting only a portion of the cuts included in Trump’s 2025 legislation, including the standard deduction increase and the elimination of taxes on tips and overtime.
But the Republican plan goes much further by adopting additional individual tax cuts, like an increase in the child tax credit.
The GOP plan also includes several tax cuts for businesses, like allowing them to immediately deduct from their taxable income the amount spent on new equipment.
Democrats argue the full Republican package cuts too deep and forces a broad wave of reductions to state agency budgets and social programs relied on by working and middle class Arizonans, like food assistance.
They’ve also criticized Republicans for continuing other tax cuts geared towards corporations, like a data center incentive estimated to cost $38 million annually.
“That is corporations first, Arizona last. Data centers first, Arizona last,” House Minority Leader Oscar De Los Santos (D-Laveen) said.
Democrats have called on Republicans to scale back the plan, while keeping the cuts they say will most benefit the average Arizona taxpayer, like the standard deduction.
Republicans, though, argue their cuts will ultimately benefit most Arizonans by keeping more cash in their pockets.
“I'm voting yes on this budget because of its huge tax cuts, which increase affordability, and affordability is on everybody's mind,” Sen. John Kavanagh (R-Fountain Hills) said. “It also has no tax increases, which are the enemy of affordability.”
Child tax credits and charitable contributions
It is difficult to quantify the exact impact that the full adoption of the Republican-backed cuts would have on Arizona taxpayers, because data on how many Arizonans claim specific credits and deductions is sparse.
But there is some information available from the Arizona Department of Revenue.
For instance, data from the department indicates that 999,467 taxpayers claimed the child tax credit in 2023. That would suggest that a sizable number of Arizonans could benefit from the Republican proposal to increase that credit from $100 to $125 for dependents under 17.
The Department also reported that 186,050 Arizonans claimed credits for making contributions to charitable organizations in 2023.
Those filers could be impacted by a change allowing people who itemize deductions to claim up to $1,000 in charitable contributions.
But the adoption of a so-called “floor” for itemized filers who claim charitable deductions could also affect those filers. That floor would require taxpayers to make charitable contributions equal to at least 0.5% of their adjusted gross income before they can claim a deduction.
Research and development tax credit
On the business side, a change that would allow Arizona businesses to fully deduct expenses for research and development activities in the state could have a significant impact.
According to ADOR, 574 businesses claimed the research and development tax credit in 2022 at a cost of $173 million — making up the single largest individual chunk of corporate tax breaks tracked by the department.
Democrats argue those types of taxes disproportionately benefit corporations and the wealthy.
Meanwhile, they say Republicans are trying to remove tax credits that could benefit Arizona homeowners, like the tax credit for Arizonans who install solar at their homes.
That credit was claimed by 28,501 Arizonans in 2023 at a cost of $17 million.
“It's my impression that we're repealing these incentives at the time when some of these renewable energies are the most affordable, and residential level solar lets people control their own destiny and protect themselves from utility costs,” Rep. Kevin Volk (D-Tucson) said.
Republicans, who also want to repeal corporate tax credits for pollution control equipment and renewable energy, have called those deductions “green new deal tax credits.”
