Key Points: 

• Republican and Democratic lawmakers pushed for a tax cuts package in the 2026 legislative session

• The tax cuts are intended to help middle-class earners while reducing state revenue by $1.5 billion over three years

• Housing affordability remains a key issue for many Arizonans

Lawmakers across both sides of the aisle opened the 2026 legislative session with affordability top of mind – and closed it claiming credit for making Arizona cheaper to live in, chiefly through tax cuts. 

Both housing costs – which one economist calls the biggest driver of the state’s cost-of-living squeeze – went largely unaddressed, and remain a top issue for many residents.

Gov. Katie Hobbs said in her State of the State address that was her top goal and was glad to see lawmakers focus on affordability. They sought to address the issue through tax cuts. 

GOP lawmakers wanted to fully conform Arizona’s tax code to the federal tax law passed by Congress in 2025 as House Resolution 1, the “One Big Beautiful Bill,” – and the final budget does exactly that. Full conformity is expected to reduce state revenue by nearly $1.5 billion over the next three years, and House Speaker Steve Montenegro, R-Goodyear, said conformity became the central issue for both parties this session. 

“We wanted to deliver the full tax cuts afforded to us in that big, beautiful bill,” Montenegro said in an interview with the Arizona Capitol Times. “Even the Democrats called it the Middle Class Tax Cuts, so I think it became the center stage.”

The final deal effectively merged the two: Republicans got full conformity, while putting Hobbs’ Middle Class Tax Cuts” branding on its centerpiece provisions – no state income taxes on overtime and tips, an increased standard deduction – from $15,000 to $15,750 for single filers – and an additional $6,000 deduction for Arizona seniors.

The state budget also includes a three-year moratorium on new data center subsidies, which is expected to save the state $57 million and was a major priority for legislative Democrats. 

“We delivered very important middle class tax cuts … that are going to help everyday Arizonans instead of giving these handouts to data centers,” said House Minority Leader Oscar De Los Santos, D-Laveen. 

Both Montenegro and De Los Santos credited their own members for making Arizona more affordable. Montenegro pointed to the governor’s January executive budget proposal, which Republicans opposed because of proposed taxes that were in the budget like a $3.50 nightly fee on short-term rentals and a 45% tax rate on the largest sports betting operators – both of which Republicans deemed nonstarters in negotiations. 

Many budget wins for Democrats were efforts to mitigate effects from H.R. 1, De Los Santos said. The budget includes funding for 163 full-time employees at the Arizona Health Care Cost Containment System and the Department of Economic Security to handle demand from people seeking healthcare coverage and food assistance, as well as another $4 million for rural hospitals to offset reduced federal funding. 

“Thanks to what Democrats have fought for, Arizona will be a little more affordable for working families, but I want to be clear that there is still trouble coming from Washington,” De Los Santos said. 

A January report from Democrats on the Congressional Joint Economic Committee estimated the average Arizona household paid more than $1,500 in higher costs in 2025, the first year of Trump’s second term. 

Not everyone pins Arizona’s affordability problem on Washington – or on taxes. A May 12 report from the Common Sense Institute, a research organization, attributed recent higher costs in Arizona mostly to higher energy costs driven by the conflict with Iran. The report found energy prices in the Phoenix metro area have risen almost 23% since last year and consumer prices broadly have increased by nearly 35% since April 2019. 

Zachary Milne, a senior economist and research analyst for Common Sense Institute Arizona, said that while the Iran conflict has had a significant impact since it started, a decade-long shortage of housing supply is the main cause of the affordability issues Arizonans are feeling.

The typical home value in Arizona was just shy of $250,000 in 2018, according to real-estate marketplace company Zillow, but has climbed past $400,000 in 2026, after peaking at $465,000 in 2022.

Milne said the tax cuts would be modestly helpful for Arizonans, but he didn’t believe the cuts pushed for by both parties would have the magnitude to address affordability issues for most residents.

“I don’t think (tax cuts are) a solution to the affordability problem,” Milne said. “We get housing under control, it’s not going to solve everything, but I think largely the issue of affordability is going to fall off.”

Lawmakers at the state Capitol have attempted to reduce regulations for new home construction in recent years, but efforts to craft statewide policy have mostly been unsuccessful as legislators and homebuilders have been unable to reach consensus with municipal leaders over bills like the “Arizona Starter Homes Act” in the 2024 and 2025 legislative sessions. 

Some housing bills did become law this session, including House Bill 2999 from Rep. Jeff Weninger, R-Chandler. The measure will allow property owners to create infrastructure districts to finance costs related to new housing, like water and sewer systems, without increasing local taxes. 

“Infrastructure is one of the biggest costs baked into the price of a new home. HB2999 gives builders, landowners, and communities an innovative tool to pay for that infrastructure over time, get more homes built, and avoid putting taxpayers on the hook. This is a pro-growth, pro-taxpayer housing solution,” Weninger said in a statement. 

Milne said he believes housing measures like HB2999 will have a positive impact on the market for homebuyers, but the Legislature has yet to take on policy that tackles long permitting times and regulatory costs. 

“It’s a supply issue. We need to build more housing,” Milne said.