Q&AZ: What happens if Arizona lawmakers adopt state-level tax cuts like Trump's?

President Donald Trump’s sprawling tax bill could cost Arizona hundreds of millions of dollars if lawmakers choose to add new state-level tax cuts mirroring changes at the federal level.

Many states typically choose to conform with federal tax policy to simplify the filing process. In Arizona, lawmakers consider legislation each year to adopt those changes.

If lawmakers adopt every cut included in Trump’s so-called “Big Beautiful Bill,” that would cost the state around $380 million in 2026, according to legislative budget analysts. That would amount to about 2% of the state’s current $17.6 billion budget.

But the impact isn’t negligible, as legislative budget staff also predict the state will only have a $200 million budget surplus next year.

Jim Rounds, an economist with Rounds Consulting, said there is the potential for those cuts to spur economic development to offset the costs. But he said projecting the exact impact of the tax cuts is difficult to do before they go into effect, citing the income tax cut passed by Republican lawmakers in 2021 and signed into law by former Gov. Doug Ducey.

“The state scored it as a pretty significant cut — it was around $2 billion,” he said. “We figured that the state would get about a third of that back from the dynamic benefits, and it should be scored at a third less.”

Those dynamic benefits include increased investment by private sector businesses and an uptick in personal spending driven by the tax cut.

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But, unlike that state-level cut, Trump’s tax legislation includes dozens of different tax cuts for both individuals and businesses.

According to the Joint Legislative Budget Committee report, the cuts that would cost the state the most annually include the removal of the tax on overtime ($76.5 million) and an increase in the SALT deduction ($79.7 million), which lets individuals deduct up to $40,000 in previously-paid state and local taxes.

“The trouble with trying to do the dynamic estimates of all of these things together is it's hard enough just to calculate what we think a very rough estimate is of the dynamic impacts of one tax in Arizona, let alone how is this going to impact the nation as a whole,” Rounds said.

Rounds said it could take years to determine the full impact of Trump’s tax bill, which includes dozens of moving parts, including federal Medicaid and food assistance spending cuts, that will also impact state coffers.

It’s still unclear whether Arizona will conform with the federal changes, a maneuver that would require approval from Democratic Gov. Katie Hobbs and the Republicans who control the state Legislature.

Christian Slater, a spokesman for Hobbs, said the governor has not yet taken a position on whether to support conforming with federal tax changes, though he criticized Trump's legislation, saying “it will have devastating impacts for working families throughout Arizona.”

“Our administration is going through every provision with a fine tooth comb to understand the full implications of this legislation and how to best protect Arizonans,” he said.

A spokeswoman for the Republicans who control the state Senate noted that lawmakers introduce a tax conformity bill each year, but did not have information on what that legislation would look like next session.

Senate Majority Leader John Kavanagh (R-Fountain Hills), who chairs the Appropriations Committee, told Axios Phoenix that a failure to conform with federal changes would cause “chaos.”