PHOENIX — The end appears near for tax breaks to build data centers in Arizona.
Gov. Katie Hobbs told Capitol Media Services she sees no need for the incentives that allow the often-controversial developments to get exemptions from state and local sales taxes for the equipment they buy.
Hobbs actually voted for the incentives as a state legislator when they were first approved in 2013, albeit as part of a larger budget proposal. But things are different now, she said.
"The incentives have done their job,'' Hobbs said in an extensive interview. "We are the Top Two markets in the world for data centers right now. And it is time for us to strike the right balance.''
The Democratic governor will make her position official on Monday when she gives her State of the State speech as lawmakers return to the Capitol.
Affordable housing, rentals, taxes
Another priority Hobbs will announce Monday includes establishing a bond fund that could help create upward of $300 million in affordable housing.
She also wants to impose a $3.50-a-night tax on "vacation rentals,'' with the proceeds used to subsidize the cost of utilities for those on limited incomes. But she won't say whether she supports more comprehensive proposals to allow cities to outlaw vacation rentals or place limits on how many can be located there.
Hobbs also will make a big push for what she calls her "middle class tax cut program,'' taking some of the tax cuts approved by Congress in the "Big Beautiful Bill'' and applying them at the state level. These include a higher standard deduction and an exemption from state income taxes for tips and overtime.
Election-year backdrop
However, the governor already is teeing up what is expected to be her first of many vetoes this session, saying she will reject a broader plan pushed by the Republican majority to enact other parts of that congressional bill on the state level to provide tax relief for businesses and some higher-income Arizonans.
But her support for killing the data-center incentives could provide a bit of rare bipartisan cooperation in this election year, as Hobbs is in the last year of her term and faces what's expected to be a tough reelection campaign. In fact, she noted that a bill to do what she wants already was introduced — by a San Tan Valley Republican, Rep. Neal Carter.
The 2013 law at issue permits the Arizona Commerce Authority to certify new data centers for the tax breaks; lawmakers voted in 2023 to extend those credits through 2033.
Gov. Katie Hobbs giving her State of the State speech to the Legislature a year ago. The 2026 version will come on Monday, Jan. 12.
Carter's proposal would pull the plug on new applications at the end of the year.
He said it's what his constituents want. "They think they're ugly,'' he told Capitol Media Services of data centers. "They think they use a lot of water.''
Carter's bill, and what Hobbs wants, would not place a legal barrier in the path of any company that wants to build a data center in Arizona. It would simply eliminate the financial incentive for that to happen.
Providing special breaks for some, which Carter says ends up increasing the tax burden on everyone else, is "a bad way to do public policy,'' he said.
Hobbs agrees.
"We don't need to incentivize them anymore,'' she said. "They're here. And I don't think the taxpayers should be subsidizing them."
There's another bipartisan angle to all this. U.S. Rep. Andy Biggs, who also voted for the original 2013 bill when he was a state senator, said he, too, supports what Carter wants to do.
That's especially significant because Biggs is running to be the Republican nominee for governor to take on Hobbs this year.
In some ways, elected officials' newfound second thoughts about data centers — just three years after lawmakers renewed the law — reflect rising public opposition.
Hobbs noted that the Tucson City Council in August rejected annexing and providing water to a proposed $3.6 billion "Project Blue'' data-center complex amid concerns about high water use and whether it will strain local power grids. That hasn't halted the project, however, which is now planned for placement outside the city limits with an agreement with Tucson Electric Power to supply it.
The governor also cited the unanimous decision of the Chandler City Council a month ago to refuse to rezone property there for a data center.
Hobbs wants fee on water used by data centers
There's another benefit to putting a kibosh on new benefits.
The Arizona Department of Revenue estimates the incentives lose the state about $38 million a year.
"We're facing a challenging budget year,'' Hobbs said. "So any way we can help free up revenue is going to matter.''
There is one thing in the governor's proposal that is not in Carter's legislation.
She wants a penny-a-gallon fee on the water used by data centers, with the estimated $6.5 million that would be raised each year to fund water conservation and recycling efforts.
But Hobbs, in her wide-ranging interview, also said there are limits to how far she expects to go in bipartisan cooperation.
With 2026 an election year, Republicans are crafting measures that, based on the governor's prior statements and actions, are virtually certain to draw vetoes.
That would hardly be a surprise. Hobbs set a new record for vetoes last session at 174. That means she rejected four out of every 10 bills sent to her.
The governor was unapologetic. "I'm going to be a backstop against the attacks on our freedoms, against the ridiculousness,'' Hobbs said.
More vetoes ahead
She is already sending out a warning to the GOP majority not to approve measures they know she won't sign.
"Certainly, if they're sending stuff they know I'm going to veto just to trigger a veto, it's a little disingenuous,'' the governor said. "It's a political stunt.''
But there's more involved politically.
Republicans already are making plans to send directly to voters some of the bills Hobbs already vetoed and others she is expected to reject this year. That would put those issues — and the governor's action — on the same November ballot where she is seeking reelection.
And some of those issues may have more public support than Hobbs is willing to concede.
One is a high-profile question of whether those born as biological boys should be able to play on girls' teams.
That has drawn national headlines in some cases. Hobbs said it shouldn't require a new state law.
"They are creating political issues out of things that have to do with individuals and their personal freedom and safety and affect a few people,'' Hobbs said. "If they want to send that to voters, that's their prerogative.''
There's another hot-button issue that affects more people than sports: Whether boys should be able to use locker rooms and restrooms that are marked for girls only. Hobbs, who has vetoed this measure several times, said she sees no reason for voter intervention and creating a statewide law.
"Why can't we just have unisex bathrooms?'' she said.
In fact, that was part of legislation proposed by Republican Sen. John Kavanagh that Hobbs vetoed. He would require schools to have a single-occupant restroom for students who did not want to use the one linked to the gender they were assigned at birth.
Hobbs, however, said she still doesn't see a need for statewide legislation.
"Let the schools figure this out,'' the governor explained. "We should not be making this a political issue.''
Hobbs said she's not willing to guess whether she will break her own veto record this session.
"I know there is a record number of bills being filed right now,'' she said. "And I have never been good at the prediction business.''
There are, in fact, plenty of measures already filed that could provoke vetoes, including a plan to alter the deadline for voters who get their ballots by mail to return them to polling locations.
Others that could get a veto stamp if approved by the Republican-controlled Legislature include:
- Exempting anyone younger than 25 from state income taxes, but only if they're married, and the spouse also is under 25;
- Raising speed limits on rural highways, including a test of no speed limits along a stretch of Interstate 8;
- New reporting requirements on abortions;
- Allowing people to make payments to the state with cybercurrency;
- Requiring public schools to let students in private schools join their sports teams;
- Various restrictions on gender-reassignment procedures;
- Stiffer requirements to collect unemployment benefits.
