Hobbs signs $18.3B Arizona budget with tax cuts, data center freeze

PHOENIX — Gov. Katie Hobbs signed an $18.3 billion state budget Saturday, ending months of negotiations with Republican legislative leaders and averting the possibility of a state government shutdown at the end of June.

The fiscal year 2027 spending plan passed the Republican-controlled House and Senate with bipartisan support on June 11 before reaching Hobbs’ desk. State budget documents project approximately $18.33 billion in General Fund revenue and $18.29 billion in spending, leaving a projected ending balance of about $42 million.

The agreement represents a compromise between Hobbs and legislative Republicans following a spring standoff over taxes and spending. Republicans approved an earlier budget largely along party lines in May, but Hobbs vetoed the package. Negotiations resumed later that month.

Among the most significant provisions in the final deal is roughly $1.4 billion in tax reductions over three years tied to changes in federal tax law. The budget initially brings Arizona into full conformity with tax provisions contained in President Donald Trump’s federal tax package, including exemptions for some income from tips and overtime, an increased standard deduction and a deduction for seniors. Future changes include an expanded child tax credit.

Republicans made federal tax conformity a central demand throughout the negotiations. Hobbs and legislative Democrats had supported some of the individual tax provisions but resisted the full Republican proposal and the spending reductions initially proposed to offset them.

The final agreement reduced most state agency cuts to 2.5%, down from the 5% reductions included in the Republican budget Hobbs vetoed in May. Arizona’s public universities were among the institutions affected by the reductions.

Democrats also secured a three-year moratorium on issuing new tax-incentive certificates to data centers. The rapidly expanding industry has attracted increasing scrutiny at the Capitol because of its electricity and water demands as well as the cost of existing state tax exemptions. Supporters of the moratorium estimated it could preserve more than $57 million in state revenue.

The budget also includes $14.2 million to hire 100 additional Department of Public Safety troopers, with half designated to assist with immigration enforcement and border security, according to reporting by the Arizona Mirror. That provision and the absence of new restrictions on Arizona’s universal Empowerment Scholarship Account program prompted some legislative Democrats to vote against portions of the budget.

One major issue left unresolved was Proposition 123, the voter-approved mechanism that previously provided roughly $300 million annually for K-12 schools from the state land trust. Lawmakers did not reach an agreement to send a replacement or extension to voters.

Hobbs called the final agreement a bipartisan victory, highlighting the tax provisions, data-center moratorium and investments in education, water, health care and public safety.

“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,” Hobbs said in announcing her signature.