The bill advanced Wednesday would prevent teachers and day care workers employed by religious organizations from applying for unemployment benefits if terminated.
Arizona law already allows religious organizations to avoid paying unemployment taxes for ordained employees and other workers.
Proponents say the proposed law is necessary after state tax officials recently started interpreting the current religious exemption so that it only applies to ministers and not private school teachers. They say religious schools will go bankrupt if they have to pay unemployment taxes.
But Democrats say churches should provide unemployment benefits to teachers.
The Republican-led Arizona House passed the legislation in a partisan vote in March.