Arizona lawmakers advanced a $18.3 billion bipartisan state budget proposal on Wednesday that includes massive tax cuts and walks back, partially, cuts to state agencies proposed by the House and Senate’s Republican majority.
The budget passed out of a joint committee hearing with overwhelming support. Only three out of 28 lawmakers voted against the spending plan.
Senate Minority Leader Priya Sundareshan (D-Tucson) said overall, Democrats are at a six or a seven out of 10 in terms of satisfaction with the budget, which will require the support of both parties to pass out of the House and Senate. Both are expected to vote on budget bills Thursday.
Democratic wins: DES hiring, education
Democrats said they fought for funding to offset the effects of HR 1, the federal tax cut bill signed by President Donald Trump last summer.
Leaders at the Department of Economic Security, which administers SNAP, have argued the department is understaffed, making it difficult to keep up with applicants trying to satisfy the new federal requirements.
Rep. Oscar De Los Santos (D-Laveen) said the new budget includes money to mitigate the effect of federal changes and modifications to Medicaid eligibility.
“So what this budget does is it invests about $21 million to hire new staff at AHCCCS and the Department of Economic Security to help Arizonans navigate this new HR 1 disaster that Donald Trump has put in place,” he said.
De Los Santos said the budget also includes $11 million for rural hospitals affected by federal funding changes approved last year.
The budget deal does not include plans to renew Proposition 123, an education funding measure that expired last year. Renewing Prop. 123, which injected around $300 million into public education by increasing the amount of funding schools received from the state’s land trust fund, was a major priority for Gov. Katie Hobbs and legislative Democrats.
Hobbs even cut off budget negotiations earlier this year after complaining that Republicans weren’t negotiating a Prop. 123 renewal in good faith.
Even without Prop. 123, Democrats say they scored other victories for public education.
That includes $37 million to continue a public education budget mechanism that boosts funding for low-income schools.
“House Democrats and Senate Democrats have won $37 million in what's called the opportunity weight,” De Los Santos said. “This is funding that goes directly to public schools that serve low-income students. That's a very big deal.”
De Los Santos said the budget deal also includes $2 million to continue a program that eliminates co-pays for students who qualify for reduced price school lunches.
The budget proposal does include a 2.5% cut to most state agencies, but makes exceptions for several, including the state Department of Economic Security and the Arizona State Schools for the Deaf and Blind.
That’s a deviation from the Republican-only budget plan, which would have cut nearly all state agencies by 5%.
Part of the reason is that the state had an unexpected influx of money thanks to high capital gains, Rep. David Livingston (R-Peoria) explained.
When Arizonans make money on the stock market, they’re taxed on those gains. Those income taxes make it to the state general fund. According to Livingston, Arizona got more from that pool than lawmakers anticipated. That negated some of the need to slash agency budgets.
Sundareshan said the increase in capital gains revenue could be a bad sign for the future of the economy, even though it’s helping balance the state budget now.
“I say unfortunately because it also signals a lessened confidence in the stock market for the future because investors are souring on the economy and future budgets are going to be very difficult, and that’s a big picture outlook,” she said.
Republicans tout tax conformity
Arizonans won’t have to refile their taxes this year, thanks to a bipartisan budget deal which matches state tax policy to federal reforms.
Unlike several other states, Arizona didn’t address its own tax law to conform with federal changes before the April 15 filing deadline, leaving people unsure about how to file their taxes.
Republicans touted tax conformity as a win, noting Arizona is the only state to match federal policy exactly, despite the fact that neither Arizona Democrats nor Republicans wanted to follow all the federal changes.
But lawmakers agreed to comply this year to spare people the frustration of redoing their forms.
“The budget incorporates full federal tax conformity provisions, making Arizona the only state in the nation to adopt President Trump's tax cuts at the state level,” GOP senators said in a statement.
GOP lawmakers tried to pass a tax conformity package earlier this year ahead of tax filing season to clarify how Arizonans should file their taxes, but Hobbs rejected the plan.
They pledged to pass tax conformity in the budget, which is achieved.
Altering the deductible amount from itemized State and Local Tax deductions was a sticking point that the state will conform with, but which state lawmakers didn’t want.
“I was not happy that the SALT reform was done in D.C., but it was so — and we needed to honor that, because people have already filed taxes,” Livingston said.
The SALT deduction allows filers who itemize to deduct their state and local taxes from their federal income return.
The federal government changed the deductible amount from $10,000 to $40,000. State lawmakers are reverting back to $10,000 starting next year.
Sen. Mitzi Epstein (D-Tempe) spoke against the tax cuts included in this year’s budget, arguing that it’s unsustainable.
“Arizona is spiraling downward in revenue, and that means we're spiraling downward for the people of Main Street, because less revenue means less pay for teachers and less pay for [developmental disability] caregivers and less pay for the people of Arizona to put food and dinner on the table,” she said.
Pause on data center tax breaks
The bipartisan state budget plan puts a three-year moratorium on new tax breaks for data centers, which is a win for Democrats.
Arizona has offered tax breaks to data centers since 2013, but recent widespread concern about the energy and water use of those data centers have made some legislators reconsider the value of the incentives.
Hobbs proposed eliminating them altogether at the beginning of the year, although she voted to establish the tax breaks in the first place as a legislator in 2013.
The three-year moratorium is a compromise, which Livingston said doesn't make much of a difference either way.
“All the existing data centers that have been built and the ones that are building and the ones that have been approved, but haven’t started yet, are grandfathered in. I don’t think it’s a big policy gain or loss,” Livingston said.
The moratorium is expected to save the state about $12 million over the next year, which is small in the grand scheme of the state budget.
For Democrats however, the moratorium sends an important message.
“We have completely flipped the script. Today, Arizona takes the next step in becoming the first state in the country to place the toughest moratorium on a data center tax giveaway,” Rep. Oscar De Los Santos (D-Laveen) told his colleagues.
In Hobbs’ January budget proposal, she suggested adding a fee on data centers’ water use to pay for a Colorado River protection fund, in advance of impending cuts to the state’s water supply.
That idea didn’t make it to the final budget.
What's not included: School voucher reform, short-term rentals
In addition to Prop. 123, Hobbs and legislative Democrats have pushed for reforms to the state’s universal school voucher program, also called Empowerment Scholarship Accounts. But Republicans staunchly opposed any changes to the ESA program for the fourth year in a row.
Also absent from the budget are regulations on short-term rentals, like those rented through platforms Vrbo and AirBNB, which Hobbs proposed in January.
Full conversation from The Show
MARK BRODIE: ... State lawmakers are expected to debate, vote on and approve a new state budget today. The bills cleared their respective appropriations committees yesterday, teeing up today's action on the $18.3 billion plan. KJZZ's Wayne Schutsky from the Politics Desk has been at the state Capitol following this. He is there now and he is with us at this moment. Good morning, Wayne.
WAYNE SCHUTSKY: Good morning.
MARK BRODIE: So, what are some of the key takeaways from this budget? Like, what are lawmakers from both parties saying are sort of their their top lines on this?
WAYNE SCHUTSKY: Yeah. So, as Rep. David Livingston, one of the chief negotiators of this budget on the Republican side, said, "All that matters is the tax cuts." So, this basically nearly fully conforms with those federal tax cuts that were included last year in the in the so-called "Big, Beautiful Bill." That was something Republicans had fought for for a long time. Uh big takeaway for Arizona voters is it looks like no one will need to re-file their taxes cuz it will be retroactive for this year, obviously.
MARK BRODIE: Right. And that was, of course, a big fight earlier in the session. The Legislature sent the governor a couple of bills with full tax conformity. Is that what is in this budget?
WAYNE SCHUTSKY: Yeah. This is more or less that that plan they sent. There's a few — after this year, there's a few little, small differences between the federal, you know, like increasing deductions for state and local taxes, that kind of thing, that are removed. But by and large, it is conforming with those those changes. No tax on tips, no tax on overtime, all those um headline-making tax cuts we heard about.
MARK BRODIE: OK. So, what are Democrats happy about?
WAYNE SCHUTSKY: Yeah. Democrats, they didn't get a lot of their big wins on this, something like Prop. 123 renewal, that education funding measure that expired that they've been fighting to include in this. But they did point out that they got money for AHCCCS, which is Arizona's Medicaid agency, and the Department of Economic Security, which runs the food stamp program, to try and mitigate the effects of that "Big, Beautiful Bill."
You know, we've reported that over half of Arizona's food stamp recipients have been booted from the rolls, more or less, since that went into effect. So, what they did is they got $21 million to hire new staff at those agencies because what we're hearing from the agencies is a lot of these people are being removed not maybe because they don't actually comply with these new rules, but because the agencies just can't process these new applications and all the new bureaucratic work that goes along with this in time. And it's resulting in people not being able to meet those new requirements.
MARK BRODIE: So in theory then, by hiring more staff, people who are eligible would be able to stay on the rolls, and only those who are removed are those who who shouldn't have been there to begin with?
WAYNE SCHUTSKY: Correct. And, you know, we saw, I believe it was last year DES, one of the agencies that runs the SNAP food program, lost 500 staff because of federal cuts. And so, that was what they blamed not only for problems with SNAP, but problems processing unemployment claims and things like that. So, theoretically, getting more of these employees in place to help process all of this stuff, yeah, will help keep those people who otherwise are eligible keep them getting their benefits.
MARK BRODIE: Sure. OK. So, Wayne, yesterday I mentioned that the bills cleared appropriations committees in both the House and Senate pretty easily. There were a few no votes in both chambers. Are you expecting fairly smooth sailing today?
WAYNE SCHUTSKY: Yeah. It seems like, you know, this is a bipartisan budget. It had to be negotiated between a Democratic governor and a Republican-controlled Legislature. And it seems like this time around, they did a lot of that hard work hashing out their differences behind closed doors.
So, as you mentioned, there's some Republicans who don't like it because they think spending is increasing too fast, and there's some Democrats who don't like it because they think these tax cuts are eating into social services that Arizonans need. But by and large, I think everyone kind of bit their tongue on the things they didn't like, realized they got a few good things out of it and are are looking to pass this budget.
MARK BRODIE: Are you expecting any changes? And I'm specifically curious about something that that you had reported on dealing with some money — a pretty small amount of money in the overall $18.3 billion scheme of things — for oversight. Like, is there a chance that something like that could get added in?
WAYNE SCHUTSKY: Yeah. I'm not expecting any big changes. You know, Livingston, who's overseeing this process, warned lawmakers that because this was all already negotiated between, you know, three different parties, that getting a big change through might not happen. But yeah, a small change like you mentioned. This has to do with oversight at group homes for Arizonans with developmental disabilities, something that was created after the well-publicized sexual abuse and rape scandal at Hacienda HealthCare years ago.
Something like that, it was left out of the budget for some reason. No one can really tell me why. But like you said, it's only $1.2 million, which for people like you and me, a lot of money, but in the grand scheme of this budget, not really. So, I could see a small change like that, them finding a way to to move money around to get that done.
MARK BRODIE: OK. Now, Wayne, the word is that the Legislature might be trying to wrap up the entire session maybe by tomorrow. Other than the budget, which of course they have to do, what else is left?
WAYNE SCHUTSKY: A lot of it has to do just with passing bills. You know, this is, you know, as you said, this is end game. So, you know, anything they want to get through has to be done now. So, one thing that could happen — we're already seeing a lot of those bills go through, but one thing is these ballot referrals that we saw clog up the ballot last time around could happen again.
There's been a lot of them floating in the ether, but not many of them have moved through. But we've got dozens and dozens kind of hanging in limbo. Things like changing — making major changes to voting laws, a lot of culture-war stuff on on pronoun usage and who can use what bathrooms and what sports teams people can play on. And then one that would uh, you know, increase legislative pay, and then another one that would stop them from getting paid if they don't pass a budget by the end of April.
So, tons of those ballot referrals and then there's actually a hearing today to confirm a few of Gov. Hobbs' —
MARK BRODIE: Agency nominees, right?
WAYNE SCHUTSKY: Yeah. So, a few of those have to get done too. So, there's three on the board that will be happening concurrently with some of these budget hearings today.
MARK BRODIE: And safe to say, Wayne, that at least some of those bills or ballot referrals are being used as leverage to get maybe members with a little bit of heartburn on board with the budget?
WAYNE SCHUTSKY: Yeah. I mean, I can't say that with 100% certainty, but every year we do kind of see, you know — I don't want to say held hostage — but we see ... we say, you know, you like this part of the budget, you don't like this part of the budget. If you can swallow that, then we'll, yeah, we'll get your bill or your ballot referral across the finish line or at least put it up for a vote. At that point, it's up to the individual lawmaker to decide how they want to vote on that.
MARK BRODIE: All right. That is KJZZ's Wayne Schutsky from the Politics Desk at the state Capitol, where hopefully he will not be all night. Wayne, thanks as always.
WAYNE SCHUTSKY: Yep. Thank you.
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