Budget, then bounce

The end is near.

After weeks of closed-door negotiations over how to spend billions of your tax dollars, lawmakers are finally ready to let the public see their budget plan.

And hopefully you don’t have any follow-up questions, because they’re also planning to adjourn for the year after passing a budget this week.

After months of turbulent negotiations between Gov. Katie Hobbs and Republican legislative leadership, lawmakers finally introduced budget bills Tuesday.

At 10 a.m. today, House and Senate lawmakers are holding a joint appropriations meeting to discuss it all.

Hobbs and Senate Republicans dropped press releases touting the $18.3 billion spending plan, especially the $1.4 billion in state taxes it cuts.

The negotiated plan cuts about 2.5% in spending from most state agencies — an improvement from the 5% across-the-board cuts in the GOP-only proposal Republicans passed in May.

The plan is to pass the budget through both chambers this week, clear out the pipeline of remaining legislation and a curated list of GOP ballot referrals, then adjourn “sine die” by Friday.

But, as Republican budget leader Sen. John Kavanagh put it: “The best-laid plans of mice and legislators can often go awry.”

If you’re just tuning in now, a quick refresher:

About a dozen Republican Senators have a trip to D.C. planned for Monday, the day after Trump’s birthday festivities, which include a UFC fight on the White House lawn. If lawmakers can wrap up the state budget fight this week, some of the senators could jet out to D.C. earlier to see the state-sanctioned fight.

Democrats are making post-session plans, too: the Arizona Democratic Legislative Campaign Committee has a “Sine Die Fundraiser” tentatively scheduled for Monday, featuring “House and Senate Democratic leaders,” according to an event flier.

Assuming lobbyists want to buy tickets, which run up to $5,000 for a “gold” sponsorship, the event has to happen after the Legislature adjourns. The ADLCC can raise money, but lawmakers can’t solicit or accept campaign donations from lobbyists while the Legislature is in session, making an in-session caucus fundraiser featuring legislative leaders a logistical headache.

So far, every budget deal passed under Hobbs has seen some version of the political Goldilocks syndrome: too conservative for some Democrats, not conservative enough for some Republicans, but good enough to pull a bipartisan majority of lawmakers’ votes.

But in a Legislature as closely divided as Arizona’s, losing even a few votes from either side can sink a budget deal, so the specific wins each party can claim are an important part of locking down votes.

Republicans at least partially secured one of their biggest priorities: adopting Trump’s tax cuts.

Hobbs and Senate Republicans celebrated the plan as saving taxpayers $1.4 billion over four years, which is another way to say $1.4 billion in cuts to government services over four years.

The plan doesn’t fully conform to the federal tax code. Instead, it picks and chooses which federal changes to adopt while adding new state-level tax breaks, similar to the plan Republicans sent Hobbs in January.

Still, it’s estimated to cost about the same as full adoption of the federal tax code, just with more palatable provisions eating into state revenues.

Republicans got to keep some of the corporate tax cuts Hobbs previously called “tax breaks to special interests.” And Hobbs got some of her “Middle Class Tax Cuts” package she called for at the start of the year, including a higher standard deduction for seniors.

The budget leaves out some costly federal provisions such as higher write-offs on state and local taxes and car loans. But it adds in new write-offs for filers with dependents under age 17 and child care costs.

Republicans tried three times this year to conform Arizona’s tax code to the new federal tax cuts in the “One Big Beautiful Bill.” Because they didn't include a mechanism to cover more than $1 billion in projected revenue losses over the next three years, Hobbs vetoed it each time.

But the state tax forms the Department of Revenue issued, and that most Arizonans have already used to file, assumed full conformity with the federal tax code. If Hobbs had blocked the changes, at least some taxpayers would have had to file amended returns.

The budget essentially lets the tax forms Arizonans used this spring stand as-is, since they were already built around the updated federal tax code. The negotiated state-level tweaks would show up next year, on returns filed in 2027.

Those tax changes mean huge losses to Arizona’s coffers, and the state’s finances are already tight. The Legislature’s financial experts at the Joint Legislative Budget Committee recently warned that things will get worse as the war in Iran continues.

That’s part of why Democrats pushed to send Prop 123 back to voters this year. The measure expired last year, leaving lawmakers to use state dollars to backfill roughly $300 million in education funding tied to the state land trust fund.

Renewing Prop 123 was one of Hobbs’ biggest priorities for the session, but Republicans wouldn’t budge. And Democrats didn’t get new limits on school vouchers, either.

Democrats are citing a plan to pause Arizona’s tax incentives for data centers as one of their biggest wins.

The budget implements a three-year moratorium on issuing new data center tax breaks, but data centers that already qualify for sales tax write-offs will continue to benefit from the incentives.

Arizona lawmakers created a tax incentive program for data centers in 2013, long before the facilities became a political flashpoint.

Hobbs actually voted for those tax cuts, as she noted in her State of the State Address this year, as part of a budget deal that included expanding the eligibility of Medicaid (or as it was called at the time, Obamacare).

In general, the tax credit lets qualifying data center operators skip sales taxes on expensive equipment, including servers, generators and cooling systems.

State financial analysts estimate it costs Arizona $38 million a year in lost revenue.

Hobbs put data center opposition in Democrats’ budget messaging when she introduced her budget proposal in January, which called not only for repealing the tax exemption but also for introducing a data center tax based on water use. And when Republicans attempted their own budget earlier this year that preserved the tax breaks, Democrats branded it a giveaway to data centers.

It’s not a purely partisan issue, however. Republican Rep. Neal Carter ran a bill this session to end tax incentives for data centers at the end of the year.

Of the 38 states currently offering tax incentives to data centers, nine state legislatures with varying degrees of partisan control have considered repealing them this year, per a National Conference of State Legislatures report.

Despite widespread public opposition to data center growth, several other state legislatures’ attempts at reining in tax breaks failed amid pushback from major tech and energy groups.

Danny Seiden, CEO of the Arizona Chamber of Commerce, recently told KTAR that the public opposition to data center growth is based on misinformation, and Arizona should embrace “computers” as one of its “Five C’s.”