Arizona lawmakers to focus on tax cuts, education, housing affordability

PHOENIX — State lawmakers launch their 2026 session Monday with a lot of money issues on their plates:

• How much to spend to maintain or expand existing programs;

• What can be done to make housing more affordable;

•  How much of a tax break to give Arizonans.

That last issue could be the first one tackled — and could result in the first veto of the year for Democratic Gov. Katie Hobbs — as the GOP lawmakers who control the Legislature play a bit of chicken with the state's chief executive.

That's because the question of state tax cuts is tied to how much of what's already in the federal "Big Beautiful Bill" approved last year by Congress they want to mirror at the state level.

Part of what makes that important is that Arizona is a "piggy back'' state,'' using the adjusted income from the federal form as a starting point to compute state taxes.

If Arizona conforms to all those changes, life is simpler for filing state taxes. But if it does not, that creates additional calculations Arizonans have to do.

The Republican leadership in the Legislature wants to conform to those federal changes.

Only thing is, that could cost the state up to $440 million a year in revenues.

By contrast, Hobbs is interested in mirroring only tax cuts for individuals — such as a higher standard deduction, an extra deduction for seniors, and no tax on tips or overtime. That carries a price tag of about $250 million.

Tax-cut plan to be tackled this week 

Chandler Republican Sen. J.D. Mesnard said the bill GOP leaders intend to send to Hobbs the first week of the  session does have most of the tax breaks she wants.

There are a few exceptions. For example, a proposal to eliminate interest payments for people who buy new cars built in America is gone. Mesnard said it's almost impossible to tell where a vehicle with a U.S. label like Ford is actually put together. Ditto a Toyota or Nissan.

Instead, there's a plan to increase tax credits for child care.

But because of how the tax code works, if Hobbs signs that bill, she also will incorporate the business tax breaks she doesn't want, such as accelerated depreciation for new equipment, into the tax code.

And if she follows through with her veto threat, that will delay Arizonans' ability to start filing their state taxes.

There's also something else: How does the state make up the cost, whichever plan becomes law?

GOP leaders think there are enough anticipated revenues to make up the gap. But that also likely means some programs given one-time funds in the past, ranging from housing to K-12 education, might be left out.

Hobbs, who is campaigning for reelection this year, isn't saying much about her plan to balance the state budget and pay for her proposed tax cut. Instead, she has suggested there could be "efficiencies'' built into state operations, though she provided no specifics.

School voucher costs

One of the biggest costs in the budget is the universal vouchers allowing all students to attend private or parochial schools or be home-schooled, using about $7,400 a year in tax dollars per student. The cost of these vouchers, formally known as Empowerment Scholarship Accounts, is approaching $1 billion a year, a significant amount in a current $17.6 billion budget. 

Hobbs has tried since taking office in 2023 to rein these in, most recently by calling for "means testing,'' in which there would be no restrictions on families earning up to $100,000, but for families making more, there would be a declining percentage of voucher money available, and no vouchers would be available to families earning above $200,000. That didn't even get a legislative hearing.

More realistic politically could be better policing of what some parents of home-schooled children have been buying with their money; reports of questionable expenses include diamond rings, appliances and gift cards. That could come with a cost of its own, however, if the Education Department is given additional staff to audit those purchases.

Money for public schools

On the subject of education, lawmakers have to decide if they're going to renew and expand a program to provide extra cash for public schools.

The original plan approved by voters in 2015 as Proposition 123 tapped into what have been considered excess earnings by the state land trust, generating about $3.5 billion over a 10-year period.

That extra funding in the plan expired in 2025.

GOP lawmakers and Hobbs want an extension, but have differed on details.

The Republican plan would earmark all the extra cash for an estimated $4,000 increase in teacher salaries. The governor's proposal so far has been to withdraw even more money from the trust to spread the wealth around for not just teacher salaries but also funding for support staff and general school needs, as well as money for school capital and safety improvement.

So far, the expiration has produced no immediate hit to schools, with lawmakers making up the difference using general state revenues to make up an extra $300 million this school year. But with lawmakers and the governor looking for every penny — and hoping to pay for the tax cuts they support — there could be pressure to renew tapping the trust and freeing up the state cash.

There's also a timing issue: Any renewal would require voter approval.

Here, too, vouchers are a factor. Some Republicans say they won't vote to put the extension on the ballot unless it includes something else, whether it's enshrining vouchers in the Arizona Constitution or, at the least, they say,  allowing students who go to public and private schools that don't have sports teams to participate in interscholastic sports at their local public school.

Affordable housing 

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Also on the agenda is the issue of making more affordable housing available.

Lawmakers made some inroads in the last two years with legislation to override various city zoning rules.

One, for example, allows homeowners to construct "accessory dwelling units,'' better known as casitas, on their properties that can be rented out to others.

More sweeping were recent laws on "middle housing'' requiring cities to allow duplexes, triplexes, fourplexes and townhomes in certain central locations that otherwise were zoned for single-family homes.

That, however, has generated kickback in some communities concerned that it will change the character of their neighborhoods. That, in turn, could provoke some changes this year to protect historic areas.

But affordability issues remain, paving the way for future fights between developers on one side and cities and their neighborhood associations on the other.

Hobbs is looking at creating a fund to pool public and private resources that developers could use to leverage other dollars to reduce the cost of construction. 

One closely related issue deals with vacation rentals.

Approved in 2022 and signed into law by Republican Gov. Doug Ducey, Hobbs' predecessor, it was billed as a method of allowing homeowners to make a few extra dollars by renting out spare rooms to tourists.

The reality, however, has been investors buying up homes for the sole purpose of renting them out, drying up the stock of available and affordable housing and rentals.

Efforts to allow local restrictions have so far stalled in the Republican-controlled Legislature. And even Hobbs has refused to take a position on the issue.

But the experience in places like Sedona, where vacation rentals are approaching one out of every five homes, has prompted some support for providing relief at least for smaller communities.

A separate question surrounds whether there's adequate ability to build new homes.

Some of that deals with the fact the state Land Department controls 9.2 million acres of land in the state, some of it on the edges of major cities.

There has been some criticism of the agency for failing to plan for future growth. The ability to develop on those lands can depend on those properties being auctioned off.

Also, cities and neighborhoods have been able to quash efforts to allow the creation of more "starter homes'' on smaller lots and with limited setbacks from streets.

Water supplies

The larger question on development for much of the state, however, relates to water.

Properties within the state's "active management areas'' can be developed only if there is an assured water supply, something defined by decades-old state law as showing there's enough water there for 100 years.

That's not an issue in areas served by cities or water companies with their own assured supplies. But it has put a damper on some new developments at the edges of urban areas.

Last year, the Arizona Department of Water Resources came up with a workaround of sorts for those properties, allowing construction if developers invest in renewable sources and reduce groundwater pumping over time.

But there's a larger issue that looms with the chance Arizona will have to absorb further cuts in its share of Colorado River water. The drought has reduced the amount of water in the river.

So far, Arizona and the other Lower Basin states of California and Nevada have agreed to further cuts. But they also want the Upper Basin states of Utah, Colorado, Wyoming and New Mexico to take less river water. 

In a display of bipartisanship, Hobbs and GOP leaders are united in saying Arizona will not surrender more,  absent some give from the other states.

But they may not have the last word: If a deal is not reached — and soon — the U.S. Bureau of Reclamation may do its own allocation of cuts, one Hobbs has warned could be even worse.

Meanwhile, plans for alternative water sources, like desalination projects, are in their infancy.

Separately, Arizona lawmakers continue to wrestle with what restrictions should be placed on pumping in rural areas where existing restrictions are pretty much non-existent, meaning that a single large farm or commercial operation with the ability to drill a deep well can pretty much proceed without regard to how it harms others in the area.

Social issues

It also wouldn't be a legislative session unless lawmakers seek to tackle social issues, particularly which restrictions to place on the conduct of others.

One measure back this session is designed to buttress existing laws that restrict those who were born male from participating in girls' sports. There already is an existing prohibition. But a federal judge has said it cannot be applied to two transgender girls who have not gone through puberty.

Also on the agenda is an effort to restrict the use of school bathrooms and locker rooms based on biological sex, defined as being determined by "anatomy, physiology, genetics and hormones existing at the time of the person's birth.'' The same definition is in a proposal to bar school employees from referring to a student by a pronoun that doesn't reflect biological sex.

All three ideas have been vetoed by Hobbs. So the plan this year is to bypass her and take the issue straight to the 2026 ballot.

Arizona law already bars sex-reassignment surgery on minors. But there are proposals to outlaw all forms of gender-affirming care, including hormones.

Finally, there are likely to be proposals to restrict abortions despite the fact voters approved a constitutional amendment in 2024 guaranteeing a fundamental right to the procedure prior to fetal viability.

And, in a related matter, there also is a bill to require child support to be paid for "preborn children,'' raising the issue of whether that would somehow grant legal status to a fetus.