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"I'm proudly working to deliver this tax cut for middle class Arizonans,'' the Democratic governor said in a news release Thursday, dubbing it "my Middle Class Tax Cuts Package.''

But this comes after key legislative Republicans told Capitol Media Services in July, after the federal law was adopted, that there is strong sentiment among the GOP legislative majority to ensure Arizona's tax code conforms with the revised Internal Revenue Code — and does so retroactively so it affects earnings in 2025.

Senate Majority Leader John Kavanagh said not conforming is not a realistic option. He said Arizonans should not have to do double calculations on everything from the standard deduction to whether Arizona, unlike the federal government, will tax their tips and overtime.

Would cost the state money

It remains unknown exactly how much such changes will cost — and where the state will get the money.

Arizona's Joint Legislative Budget Committee estimated in July that conforming to every change in federal law would carry a $318 million price tag, plus another $57 million in possible effects, a fair chunk for a state with a $17.6 billion state budget.

The best cost estimate of Hobbs' plan is $215 million, said gubernatorial press aide Christian Slater.

The difference is that the governor's proposal does not include some provisions in the federal law, such as allowing businesses to write off the cost of new equipment faster, reducing their taxable income.

Kavanagh, a Fountain Hills Republican, said Thursday he believes the Legislature will find the cash — and not just for the parts of conformity that the governor wants. If nothing else, he said the state could cut some other lower-priority programs to make up the difference, though he did not identify what he would put on that list. 

Not conforming would be hassle for taxpayers

The issue is important not only because of its cost in state revenues, but because of the hassle that not conforming would create for Arizona taxpayers.

Right now, the starting point for Arizonans to compute their personal state income taxes is the federally adjusted gross income (FAGI).

That simplifies the process for filers. They start with the FAGI and make additional calculations, such as deducting money put into 529 Plans to save for a child's college from their income. Arizona also has dollar-for-dollar credits that don't exist on the federal form, such as donations to organizations that provide scholarships for students to attend private and parochial schools.

If Arizona does not conform, however, Kavanagh said it would be an "accounting nightmare.'' That would require Arizonans to make additional calculations and add back income into the state form that the federal government has decided is no longer taxable, such as income from tips and overtime.

Hobbs, facing a tough reelection campaign in 2026, is picking and choosing which parts of the federal law she wants Arizona to follow: those she said affect the "middle class.''

"I encourage the Legislature to join with me to immediately codify my Middle Class Tax Cuts Package to increase the standard deduction, support our seniors, and allow everyday Arizonans to benefit from tax deductions on tips, overtime, and car loan interest when paying their state taxes,'' her news release says.

Proposed deductions under Hobbs' plan

Specifics include:

• Increasing the standard deduction on state tax forms from $15,000 to $15,750 for single filers, or twice that for married couples filing jointly;
• Adding an additional $6,000 reduction in taxable income for Arizonans 65 and older;
• Allowing Arizonans to deduct tips they have earned;
• Charging no state income tax on eligible overtime;
• Creating a deduction for the taxes paid on interest on loans on new cars made in Arizona.

All that can add up, depending on how many of those deductions a person can claim.

Hobbs gave an example of a 68-year-old unmarried person who has a federal adjusted gross income, earns tips working full-time at an Arizona casino, works overtime and purchased a new car in 2025.

Without conformity, the governor said, that person's state tax would be $1,500; with all the proposed new deductions, that drops to $1,031.

Sen. J.D. Mesnard, who chairs the Senate Finance Committee, which deals with the tax code, pointed out that the state has almost always conformed to changes in federal tax law.

"It keeps things simple for the taxpayer,'' said the Chandler Republican. "It's more transparent.''

Mesnard, like Kavanagh, said even with the size of the hit to state revenues — he's seen figures as high as $400 million for the whole package, including breaks to help business — he believes conformity is "do-able.''

"We just have to prioritize,'' he said.

Slater said Hobbs also believes he money can be found and a deal reached with the Republican legislative majority to finance the lost revenues — at least those on her priority list.

He pointed out that the governor has worked with the GOP majority and signed balanced budgets each year since she took office in 2023; that is something required in the Arizona Constitution. Slater said that was achieved even in the wake of cuts in state income tax enacted during the administration of former Gov. Doug Ducey, a Republican, which kicked in after Hobbs took office.

"Gov. Hobbs is confident we can reach across the aisle again and deliver a fourth bipartisan budget while delivering critical tax cuts for middle-class Arizonans,'' Slater said.

Hobbs' talk about bipartisan cooperation while trying to make a conformity plan sound like her idea drew a swat from Mesnard. 

"The governor is trying to steal credit for efforts by President (Donald Trump) and the Republican Congress,'' he said, noting that "every single Democrat voted against" the "Big Beautiful Bill," with many saying it would result in cuts to needed services. 

Reelection campaign looming

Hobbs, who won her 2022 race by just 17,117 votes out of more than 2.6 million votes cast, is trying to hold onto her seat.

Her most recent campaign finance reports showed she already had collected $9.3 million since the 2022 race, plus another $2.7 million in a separate political action committee. In her first race in 2022, she raised less than $15 million.

And while polls a year out from the election may not carry much weight, they do suggest the incumbent Democrat may have something to worry about, especially with Republicans increasing their voter registration edge in Arizona.

A Gray House poll conducted last month suggested Hobbs was trailing a "generic Republican'' by four points. A more recent poll by Emerson College, pitting her against GOP candidate Andy Biggs, had Hobbs leading by one point, well within the margin of error.