Key Points

• Arizona officials are negotiating new tax regulations 
• The governor, having vetoed one GOP tax plan, wants to know how to pay for cuts
• Failure to conform with federal code could result in the need for massive refilings 

A second attempt to align Arizona’s tax code with the federal government’s tax policy appears to be headed for a veto.

The House Ways and Means Committee on Feb. 4 passed Republicans’ second attempt at a tax conformity bill, House Bill 2785, 5-4 along party lines. The next day, the counterpart Senate Finance Committee also passed a mirror bill on party lines, expediting the bill’s path to Gov. Katie Hobbs. 

The Joint Legislative Budget Committee has estimated that full conformity would reduce the state’s general fund by $441 million in fiscal year 2026 and almost $1.5 billion through fiscal year 2029. 

The tax conformity bill would match the tax code set in the Trump administration’s “One Big Beautiful Bill,” H.R. 1, since the Arizona Department of Revenue assumes conformity to the federal Internal Revenue Code as a standard practice. 

Days before the committee’s hearing, Hobbs told reporters she did not support the bill unless Republicans showed how they intended to pay for the legislation in the upcoming state budget. 

“The entire tax conformity bill is a nonstarter if we don’t have a way of how we’re going to pay for all those tax cuts in the budget,” Hobbs said. “Tax cuts for billionaires and special interests — we need to talk about those during budget negotiations.”

The bill also isn’t the preferred solution for Republicans, but it would conform Arizona law to the Arizona Department of Revenue’s existing forms, something GOP lawmakers say is crucial to avoid confusion for taxpayers and avoid the need for amended returns to be filed. 

Capitol Media Services reported that the Revenue Department estimated about one million tax filers would have to file amended returns if the law differed from its forms. A department news release on Jan. 22 said taxpayers who needed to file amended returns if they claimed certain provisions that were inconsistent with Arizona law that eventually gets signed would not be subject to penalties or interest as long as they file an amended return before Oct. 15, 2027. 

“Now we have people who are filing so we’re passing what her forms say,” said Rep. Neal Carter, R-San Tan Valley. “It would’ve been great to have a better bill, but here we are.

Hobbs has asked for the Democratic tax conformity proposal, House Bill 2531 and Senate Bill 1203. That measure includes the provisions from her Middle Class Tax Cuts proposal such as no tax on tips and no tax on overtime. 

Republicans first tried to pass a tax conformity bill during the Legislature’s first week of session before tax filing season began, but Hobbs vetoed the measure on Jan. 16, and said she wanted her Middle Class Tax Cuts Package sent to her desk early in session while policy for high earners and corporations would be saved for budget conversations later in the session.

In a Jan. 23 letter seeking clarity for the veto of their first tax conformity bill, House Speaker Steve Montenegro, R-Goodyear; and Senate President Warren Petersen, R-Gilbert; questioned Hobbs’ support for the opposing Democratic proposal, saying it didn’t align with the Department of Revenue’s existing tax forms.

The day before the House committee hearing on HB2785, Hobbs’ budget director Ben Henderson responded to the two GOP leaders and acknowledged the Governor’s Office didn’t believe the Legislature would support Hobbs’ plan, yet he still requested to see how Republicans intended to pay for the tax cuts.

“We are not opposed to full conformity — but the Governor has been clear that she will not do so by sacrificing critical programs and services that millions of struggling Arizonans rely on,” Henderson wrote in his Feb. 3 letter. 

Henderson also said the Governor’s Office is ready to negotiate with lawmakers and offered to clear his schedule if Republicans are willing to meet with him.

Rep. Justin Olson, R-Mesa, said he didn’t believe Henderson’s response coming shortly before the Ways and Means hearing was a coincidence. That’s because Olsen said he believes that, even if the governor vetoes HB2785, it will still inevitably become state law.

“We’re drawing the governor out to have this discussion,” Olson said. “That’s a step in the right direction. It should have happened back in November.”

Chad Heinrich, a lobbyist representing the National Federation for Independent Business, said he believes HB2785 is the best and fairest solution going forward since small-business owners are trying to plan for 2026 without knowing how their 2025 income will be taxed. 

Democratic legislators also called for more communication with Republicans to get a bill moving forward. 

“I think we’re working in silos sometimes, this side and that side, and I would really like for us to work together,” said Rep. Quantá Crews, D-Phoenix. 

With both mirror bills passing in committee, the House and Senate can send the tax conformity bill to the governor after each chamber has passed its bill.