Key Points:

• Gov. Katie Hobbs called off budget discussions on March 20 over tax conformity and Prop. 123
• Republican lawmakers say Hobbs gave up when a deal was still within reach
• Consultants say leaders still have time to bicker and compromise before a June 30 deadline

Gov. Katie Hobbs and Republican legislative leaders are getting an early start to the annual battle over the state budget, leaving some wiggle room for those hoping to hit the campaign trail sooner rather than later. 

On March 20, Hobbs’ office called off budget discussions until Republican lawmakers produce their own budget proposal with a plan to pay for federal tax conformity and renew the education funding mechanism known as Proposition 123. But Capitol observers noted that there isn’t any real cause for concern just yet, since Hobbs and lawmakers still have until June 30 to work out a deal. 

“We’re still in batting practice right now when you compare it to the last couple of years,” said GOP public relations consultant Barrett Marson. “The game hasn’t even started yet.” 

By this time last session, Hobbs’ office and Republican lawmakers hadn’t even sat down for budget negotiations. But with several lawmakers up for re-election this year and a few others facing competitive primaries for statewide offices this summer, there is more incentive to end the session early.

Nevertheless, Hobbs’ communications director Christian Slater doubled down on the governor’s negotiating pause in press releases on March 23 and 25. 

“While Governor Hobbs has been at the table ready to get to work, Republicans are choosing to hold funding for Arizona’s public schools hostage because radical, fake elector Jake Hoffman thinks putting Prop. 123 on the ballot is ‘effectively underwriting the Hobbs’ re-election campaign,’” Slater said, referencing a post on X from Hoffman.

Hoffman, R-Queen Creek, was responding to an article from the Arizona Free Enterprise Club that suggested a compromise on Prop. 123 would be a “major self-own” on the part of Republican lawmakers because it would give Hobbs a win to use in her campaign for re-election. Several proposals to extend the funding mechanism, which expired in 2025 and has since been backfilled with general fund dollars, have been floating around the Capitol this session. 

One of those proposals, from Rep. David Livingston, R-Peoria, would tie the Prop. 123 extension to Republicans’ preferred tax conformity plan aligning the state with all of the changes in federal House Resolution 1. 

Conforming to the federal tax code in the federal law, the Trump administration’s “One Big Beautiful Bill,” is expected by the Joint Legislative Budget Committee to reduce the state’s general fund by $441 million in the upcoming budget and $1.15 billion over three years. 

A federal tax conformity bill is typically signed into law every year early in the session without controversy since it usually doesn’t have a significant fiscal impact, but Hobbs has said repeatedly she is unwilling to sign this year’s bill until Republicans show her how they plan to pay for the anticipated revenue hit. 

Livingston said on March 25 he thought the governor’s comments about the budget and Prop. 123 were “unnecessary.”

“We’ve been negotiating in good faith. I believe her team was trying to negotiate in good faith. If they don’t like what they hear in those meetings, that applies to both sides of the aisle. We should continue to meet and negotiate on the budget,” Livingston said. 

While he pitched a Prop. 123 extension that voters would still have to approve earlier, Livingston said he could see a budget being passed without a 123 proposal or passing a budget and then taking up Prop. 123 afterward. 

“That decision has not been made and won’t be made until we know a budget is going to be signed, probably,” Livingston said. 

Hobbs’ executive budget proposal, released in January, assumed a continuation of the 6.9% withdrawal from the state land trust and proposes a continuation of the around $300 million general fund backfill. But, Republicans said in a March 20 press release that Hobbs’ office proposed increasing the distribution from 6.9% over 10 years to 10.9% over 20 years.

“That approach would bankrupt the trust and rob future education funding from our children just to please unions today,” Republican leadership stated. 

Hobbs’ proposal also assumed the Department of Homeland Security would reimburse the state about $750 million in border related costs, but legislative Republicans aren’t so sure the state will get that entire request. 

In a statement, Senate President Warren Petersen and House Speaker Steve Montenegro said Republican leadership will spend the next several weeks crafting its own budget, signalling that negotiations are unlikely to resume anytime soon. 

Republican consultant and former legislative and Governor’s Office staffer Doug Cole said he thinks most voters will blame Hobbs for any shortcomings or issues with the budget. 

“The general public knows who the president is and they may know who the governor is,” Cole said. “Those are the people they’re going to blame.”

Marson argued that voters are unlikely to even notice any big budget battle as long as it doesn’t affect them personally, comparing it to the ongoing partial federal government shutdown affecting the Transportation Security Administration.

“If you’re not traveling, you’re not flying anywhere, you don’t notice it,” Marson said. “Arizonans won’t care about the machinations, the sausage being made, of the budget.” 

Meanwhile, House Minority Leader Oscar De Los Santos, D-Laveen, is already pinning the blame for this round of failed talks on Republicans for being unwilling to budge on Prop. 123.

“The Republicans in this chamber have failed to negotiate a 123 proposal,” De Los Santos said. “Republicans, who want to provide hundreds of millions of dollars in tax cuts to corporations and the billionaires, have proposed nothing on their side.”

Republicans worked on a Prop. 123 extension during the 2025 session that would have included protections for the Empowerment Scholarship Accounts program and put forward a proposal in 2024 that would have required the entire 6.9% state land trust disbursement to be applied to teacher salaries. 

Arizona voters approved Prop. 123 by a near 51% margin in 2016. Cole said going back to that policy would be wise for lawmakers and the governor. 

“That is $300 million that has worked for the last decade and can continue to work for the public education system. We’re going to get there at some point because it’s really going to be difficult to pass a budget without that $300 million,” Cole said. “You always have to have a blowup. We’re having our first one and there will probably be another one.”

Marson said drawing out the legislative session with a lengthy budget fight won’t hurt Hobbs, who doesn’t have a primary to face in July. He argued that Petersen’s campaign for attorney general would be most affected by a late adjournment, since he plays a pivotal role in passing the budget and faces a primary challenger in Rodney Glassman.

Other lawmakers running for statewide offices, like Rep. Alex Kolodin who is pursuing a bid for secretary of state, and Reps. Ralph Heap and David Marshall who are running for the Arizona Corporation Commission, are “backbenchers” who aren’t expected to be involved in budget conversations. If the Legislature takes any breaks while negotiations play out, those three will be able to hit the campaign trail, while Petersen will likely have to stay at the Capitol to broker a deal. 

Under Montenegro’s first term as House speaker, House Republicans held out on a budget deal agreed to between Hobbs and the Senate until June 27, just days before the end of the fiscal year.