Key Points

• Gov. Katie Hobbs’ fourth State of the State address focused on affordability and bipartisanship

• Republican leadership indicated most of Hobbs’ proposals would be dead on arrival

• Hobbs’ address kicked off a likely contentious session in a competitive election year

Gov. Katie Hobbs focused on affordability and bipartisanship during her fourth State of the State address to a joint session of the Legislature on Monday, kicking off what is likely to be a contentious legislative session during a competitive election year. 

Hobbs implored her fellow elected officials to prioritize compromise and teamwork over divisiveness and partisanship, but did not miss opportunities to take shots at Republicans in Washington, D.C., and President Donald Trump. 

She laid out new proposals to lower costs for Arizonans, including a new affordability fund paid for by a new fee imposed on short term rentals, tax cuts for middle-income families, new fees on data centers, a $2.5 million investment for accelerating housing construction and an assistance fund for utility bills. 

“Affordability isn’t a joke or some hoax,” Hobbs said, referencing remarks from Trump. “It’s a real and consequential challenge that families across Arizona must grapple with every day.”

The governor urged the Legislature to make her Middle Class Tax Cuts Package its first priority. Her plan would conform the state’s tax code to some of the federal changes made by House Resolution 1, known as the “Big Beautiful Bill,” but would leave out tax cuts for corporations and high earners.

“I recognize that you’re not going to agree with everything I say or propose here today, and that’s fine,” Hobbs said. “However, we should all agree that middle-class families deserve a tax cut now, so Arizonans can get that relief when they file their taxes this spring.”

Republicans introduced their own tax conformity plan last week, which expands on the tax cuts Hobbs proposed but leaves out other cuts outlined in H.R. 1 that the governor said she would prefer to leave for budget negotiations. Senate President Warren Petersen, R-Gilbert, said the Republican plan would be on Hobbs’ desk in days. Democratic leaders are expecting the governor’s veto pen.

“It is not a serious proposal. Put the middle class tax cuts on the board. It’ll pass, and we can take the rest in budget negotiations,” said House Minority Leader Oscar De Los Santos, D-Laveen.

Hobbs announced a plan to curb data center growth following intense pushback against projects in Tucson and Chandler in 2025. Hobbs is proposing a water user fee to fund investments in Colorado River conservation and an end to the state’s data center tax exemption, which her office says puts $38.5 million per year back into the pockets of data center owners. 

The governor announced the creation of a new active management area in La Paz County. This long-awaited decision will allow the state to reduce groundwater usage in the Ranegras Plain Groundwater Basin. She also advocated for federal intervention in Colorado River negotiations, thanking Republican and Democratic legislative leaders for standing with her to “hold the upper basin accountable,” as any seven-state deal will require legislative approval.

“The upper basin states, led by Colorado, have chosen to dig in their heels instead of acknowledging reality. As negotiations continue, I refuse to back down,” Hobbs said. 

Colorado River water agreements might be one of the few hopeful spots for bipartisanship this session. Senate Pro Tem T.J. Shope, R-Coolidge, said he was hopeful the Legislature could come to some resolution on that front. 

Hobbs touted her initiatives aimed at stopping drugs, weapons and criminal organizations from crossing the southern border, but stopped short of making any new announcements related to border security and immigration. 

The governor also stressed the importance of renewing Proposition 123, an education funding mechanism that draws on the state land trust to provide about $300 million per year to public schools. Negotiations over the extension stalled as the measure expired last year, requiring a backfill from the state’s general fund to keep schools afloat. 

Hobbs proposed yet another attempt at reining in the state’s school voucher system, known as Empowerment Scholarship Accounts, despite previous proposals becoming dead on arrival in the Legislature. The governor didn’t mention specific reforms she’s seeking during her speech, but she did call for Republican lawmakers to stop trying to constitutionally protect the program in a Prop. 123 renewal. 

“In my plan, the original mission of the ESA program — to help kids with disabilities and in military families — remains untouched,” Hobbs said. “But even the program’s most ardent supporters must agree: it’s time we tackle the waste, fraud, and abuse to ensure taxpayer dollars are going towards true educational purposes.”

Republican legislative leaders signaled on Friday during an Arizona Chamber of Commerce and Industry legislative preview luncheon that proposals to put guardrails on ESAs will meet resistance from Republican legislators. Petersen told chamber members that Democrats’ complaints about fraud and abuse in the ESA program also exist at public schools. 

“We will absolutely prosecute people who are stealing money from the ESA program,” Petersen said. “The Democrats want you to have one choice to educate your children. The Republicans want you to have as many choices as you want. Parents should decide education for their children.”

As the state faces a potential $1.15 billion loss in revenue over the next three years if the Legislature conforms to the Trump administration tax cuts from the federal budget reconciliation package, Democrats are hopeful Republicans are willing to implement some of the governor’s ESA proposals to reduce fraud in the $1 billion program.

“We’re interested in finding those savings that can be used to support the rest of the state budget and I hope they’re interested as well, otherwise, it is laughable to say that they are at all any kind of party of fiscal responsibility,” said Senate Minority Leader Priya Sundareshan, D-Tucson. 

House Speaker Steve Montenegro, R-Goodyear, called on the governor to be more open to signing Republican bills after her speech. 

“For the last three years, we’ve been sending her bills that will cut taxes for Arizonans. She has been vetoing those bills as well,” Montenegro said. “We’ve seen a governor that wants to grow government spending, as you’ve heard today.”

Sen. Jake Hoffman, R-Queen Creek, the leader of the state Freedom Caucus, made it clear during a press conference before Hobbs’ address that the number one priority for the far-right wing of the Republican Legislature will be obstructing the governor. 

“The single greatest thing that we can do this year, the single greatest thing that will improve the lives of Arizonans, is to stop Katie Hobbs’ radical agenda here at the Capitol, to make sure that her insane policies that are damaging to the people of this state don’t go anywhere,” Hoffman said. 

Shope said Hobbs’ speech played to her base and he lost track of the number of fees she intends to impose. The address was a bit of a mixed bag with the Democrats taking home a little more than Republicans, he added.  

As for bipartisanship, Shope said there’s very little discussion between the executive and legislative branches on legislation until it gets to her desk and meets an untimely death. 

Sen. Mitzi Epstein, D-Tempe, said she loved the framework for a tale of two budgets that Hobbs mentioned, adding that the Democrats’ legislative theme is making Arizona a place people can afford. She said H.R. 1 was for billionaires. 

“Let’s dangle a cute little tax cut in front of people’s faces while we sucker punch them in the gut and take away their health care and take away their SNAP benefits and so many other things,” Epstein said. 

More details on how the governor intends to implement the proposals outlined in her remarks will come later in the week, when her office releases its executive budget proposal on Jan. 16.