Arizona’s Budget Is Stuck. Here’s a Way to Move Forward. 

Arizona lawmakers are at an impasse. 

The Legislature passed a budget. The governor vetoed it. And now, instead of a clear path forward, we’re left with the same debate that has stalled progress for years: how to balance the budget while families across the state struggle with rising costs. 

At some point, this conversation needs a reality check. 

For too long, Arizona has treated tax cuts as the default strategy — assuming they will magically produce growth, attract business, and solve economic challenges. But budgets are not built on magic. They are built on math. 

And right now, the math doesn’t add up. 

The good news? There is a path forward. In fact, there’s a pretty clear recipe lawmakers could follow right now — one that would help families, strengthen the economy, and actually make the budget work. 

Step 1: Invest in what actually helps families 

If lawmakers are serious about affordability, there’s one policy that should be at the top of the list: a fully refundable Child Tax Credit. 

It’s an evidence-based policy that delivers real relief to families dealing with the everyday costs of raising kids and one of the most effective anti-poverty tools. 

Expanding Arizona’s current credit to $250 per child and making it fully refundable would cost roughly an additional $200 million a year. Arizona could choose to make the credit even more generous than $250 per child. To help contain the cost, lawmakers could focus the benefit more directly on low- and moderate-income families by lowering the income level at which the credit begins to phase out.   

The state could also meet the moment by investing in rental and utility assistance — policies that are highly effective for households under immense stress and prudent countercyclical tools during an extended period of economic uncertainty. 

Arizona needs policies that match the scale of the challenge, and it needs the revenue to fund them. 

Step 2: Stop leaving money on the table 

Arizona’s tax code isn’t neutral. It’s full of policy decisions — many of them expensive — that reduce revenue in ways that disproportionately benefit corporations and the wealthiest households. 

If lawmakers are looking for a way out of this budget standoff, they don’t need to start from scratch. They can start by rethinking a few of those choices.ⁱ 

Rethink capital gains giveaways 

Unlike most states, Arizona allows a special deduction on long-term capital gains — a benefit that largely goes to high-income households who are more likely to report income from capital gains. This can lead to an even further regressive tax system in which working families and wealthy households face different tax burdens.  

For instance, a taxpayer who reported in income solely from capital gains on assets purchased after 2011 would pay an effective tax rate of 1.875%, as compared to a person who reports solely wage income and pays 2.5%, setting aside all other deductions.  

Economists have grown concerned that capital gains in the U.S. often reflect growing inequality and income from nonproductive outcomes, including asset bubbles or anticompetitive corporate power.  

The repeal of this special deduction could potentially generate meaningful revenue as Arizona taxpayers reported over $24 billion in net capital gains in tax year 2022, of which about 87.5% were reported by households making over $200,000.  

Ask the most profitable corporations to contribute more 

Arizona could create a higher tax bracket on in-state corporate profits over $10 million — something many states already do. Corporate profits have grown as share of gross domestic product, meaning more of the gains in the economy are going to capital instead of labor.  

Increasing the corporate income tax rate on firms that report high levels of Arizona income could likely generate more than $200 million annually.  

Reevaluate tax breaks that may no longer make sense 

Arizona has offered generous tax incentives to industries like data centers — even as those projects put growing pressure on water and energy resources. 

At the same time, industry trends show these types of companies are choosing locations based on infrastructure and energy access — not tax breaks. 

In FY 2025, this tax expenditure cost Arizona nearly $40 million and is on a trajectory to continue to grow.  

That’s real money that could be reinvested in the communities. 

Close gaps and modernize the system 

There are also straightforward ways to strengthen Arizona’s tax base without harming economic activity, including: 

• Including a class of income aimed at preventing shifting profits to foreign tax havens, Net Controlled Foreign Corporation Tested Income (NCTI), in the state’s corporate tax base. 

• Modestly increasing the corporate minimum tax $50 to $250  

• Updating outdated provisions across the code 

These aren’t radical ideas. They’re rational and equitable ways to generate revenue and support economically productive state investments. 

Increase the severance tax on copper mining 

Many states have some form of royalty or severance tax on the extraction of minerals or oil and gas. New Mexico has utilized its oil-and-gas revenue to help support its child care investment. Arizona currently has a severance tax on metalliferous mining (e.g., copper). The price of copper has increased significantly due to its importance in new technologies such as artificial intelligence.  

 A severance tax, compared to a royalty or gross receipts tax, is generally less disruptive to business activity because it is tied more closely to profits and production value rather than simply taxing total sales. 

A slightly higher severance tax (0.5% to 1%  higher) could raise more tax revenue to invest in roads, water, child care, or a refundable child tax credit.  

Step 3: Take a hard look at the flat tax 

If lawmakers are serious about solving the structural budget problem, they can’t ignore the biggest factor: the flat tax. 

Arizona’s flat income tax has significantly reduced state revenue — by as much as $2.6 billion if fully reversed.  

Even a partial adjustment — like applying higher rates only to incomes above $250,000 — could generate hundreds of millions of dollars. 

And despite the promises, there’s little evidence it has delivered the kind of economic growth it was supposed to. 

What it has done is limit Arizona’s ability to invest in the fundamentals that actually drive economic strength: 

• Child care  

• Public K-12 education  

• Health care  

• Infrastructure  

This is the reality check 

Arizona’s budget debate isn’t stuck because there are no options. 

It’s stuck because the state has been relying on the same approach — cutting revenue and hoping for a different result. 

That’s not a strategy. It’s a gamble. 

And right now, it’s a gamble that’s leaving families to absorb rising costs during an affordability crisis without the support they need. 

The way forward is clear 

Lawmakers don’t need a breakthrough idea to move forward. They need to make different choices. 

The  is already there: 

• Invest in policies that directly lower costs for families  

• Rebalance a tax code that is currently tilted toward the top  

• Restore the state’s ability to fund the building blocks of a strong economy  

A refundable Child Tax Credit is a good place to start. 

Because when families are more financially stable, the entire economy benefits — businesses grow, communities strengthen, and the state becomes more resilient. 

The bottom line 

Arizona isn’t out of options. It’s just time to use them.