14-07-2025
"Big beautiful bill" tax changes could cost Arizona hundreds of millions
Federal tax code changes in the One Big Beautiful Bill could cost the state nearly $400 million, legislative budget analysts estimate.
Why it matters: The massive tax and spending legislation that President Trump signed this month could subvert the $17.6 billion budget agreement that Arizona lawmakers and Gov. Katie Hobbs reached after a protracted fight that threatened a government shutdown.
How it works: Federally adjusted gross income serves as the basis for calculating individual state income taxes.
When the federal tax code is amended, the state must also adopt those changes to maintain consistency, per the Arizona Department of Revenue.
Arizona usually passes annual legislation to conform to federal tax code changes.
The big picture: An analysis by the Joint Legislative Budget Committee (JLBC) last week concluded that conformity with federal tax changes would cost Arizona about $381 million this fiscal year.
Those changes include reduced taxes on tips ($23.6 million in fiscal year 2026) and overtime pay ($76.5 million), increased federal deductions for state and local taxes ($79.7 million), and increased standard deductions for seniors ($53.7 million).
Other non-conformity changes could cost the state nearly $57 million.
What they're saying: Gubernatorial spokesperson Christian Slater declined to comment on whether Hobbs would be willing to sign a tax conformity bill next session if it means losing hundreds of millions, telling Axios, "We are still examining the full impacts of the bill that's anything but beautiful."
The other side: Sen. John Kavanagh (R-Fountain Hills), who chairs the Senate Appropriations Committee, told Axios that non-compliance in 2026 would create "chaos," and he predicted that Hobbs would support tax conformity.
He said conformity means Arizonans will be able to spend more of the money they earn.
Kavanagh said he expects an improving economy will bring more tax revenue to the state, and even if that doesn't happen, he said the lost revenue could likely be offset by delaying budgeted infrastructure projects to the following year.
Between the lines: Arizona can adopt some but not all changes, and Sen. J.D. Mesnard (R-Chandler) thinks partial adherence is likely the way to go.
Mesnard, who often sponsors annual tax conformity bills, said it wouldn't make sense for Arizona to adopt all the changes, some of which, he noted, are only in effect federally for a few years.
