Hobbs signs $18.3B Arizona budget, calling Trump-conforming tax cuts a ‘historic’ win

Arizona Gov. Katie Hobbs signed an $18.3 billion state budget into law on Saturday, about two weeks ahead of the deadline to avoid a state government shutdown. 

The package of budget bills that garnered wide bipartisan support was the result of weeks of negotiations between the Republicans who control both chambers of the Arizona Legislature, Democratic lawmakers and Hobbs, also a Democrat. 

“I’m thrilled to sign the bipartisan Arizona First budget into law,” Hobbs said in a statement. “We’re stopping the data center tax credit for three years, investing in border security, education and water security, and delivering a $1.4 billion tax cut for middle class Arizonans. Starting on July 1, Arizonans will have no taxes on tips and overtime, a higher standard deduction, a deduction for seniors, and next year, an expanded child tax credit.”

Republicans and Democrats both celebrated the negotiated budget as a win after they voted to approve it on June 11, but it was Republicans who insisted that the $1.4 billion in tax cuts over three years was included. Those cuts will be realized by conforming Arizona’s tax code with the federal tax cuts in President Donald Trump’s “One Big Beautiful Bill.” 

Hobbs and Democrats had proposed adopting some of those tax cuts, but not all of them.

The cuts come at the cost of decreased funding for state agencies and programs. 

The budget brings the state into full alignment with the Trump tax cuts only for this year, to prevent Arizonans from having to refile their taxes. When the Arizona Department of Revenue sent out tax forms in advance of the 2026 filing season, it assumed that the state would fully conform with federal changes. 

Changes in subsequent years include elimination of the unpopular State and Local Tax deduction, or SALT, which primarily benefits the wealthy, replacing it with an increased child tax credit. 

“With this historic middle class tax cut, I’m proud to say that every year I’ve been governor, we’ve cut taxes,” Hobbs said. 

Democrats’ biggest point of pride was a moratorium on new certificates for tax breaks to the data centers that make generative artificial intelligence possible.

Republicans passed their own budget plan along party lines in early May but Hobbs swiftly vetoed it. That plan would have made 5% cuts to most state agencies, but in the final budget Democrats negotiated that down to 2.5%. 

Legislators from both parties lauded the negotiated budget’s increase to the standard deduction, no taxes on tips, no tax on overtime, $6,000 tax credit for seniors and a new child care tax credit. 

A major loss for Hobbs was her failure to convince Republicans to put a continuation of Proposition 123 to voters in the fall. Originally approved by voters in 2016, Prop. 123 provided about $300 million annually for K-12 public education from the state land trust. Hobbs initially walked away from budget negotiations after Republicans said it was off the table. 

In a win for Republicans and a loss for Democrats, the new budget put zero guard rails on the more than $1 billion universal school voucher program that came under fire after reports that parents have used voucher money to purchase things like household appliances and lingerie. 

In a June 11 statement, House Speaker Steve Montenegro, a Republican, said that lawmakers from his party were responsible for securing the tax cuts. 

“This is what Republican leadership looks like,” he said. “…Arizona families will keep more of what they earn. Parents will keep school choice. Public safety will be funded. Government will be smaller. Welfare programs will be held to basic standards, and Governor Hobbs’ push for higher taxes and bigger government was stopped.”