Behind the Tax Filing Noise: A $1.45B Hit to Arizona’s Budget
HB 2785 and SB 1638 deepen Arizona's affordability crisis
PHOENIX — In the House Ways and Means Committee Wednesday the Arizona Center for Economic Progress opposed HB 2785, the latest attempt to conform Arizona’s tax code to federal Trump tax law at a cost of $1.45 billion over Fiscal Years 2026-2029.
The bill passed committee today, and a mirrored bill, SB 1638, will be heard in a state Senate committee Thursday.
While some proponents have framed tax conformity as an administrative necessity to reduce confusion during tax filing season, the real impact of this legislation has nothing to do with forms — and everything to do with permanently draining Arizona’s budget to deliver tax breaks that primarily benefit wealthy individuals, profitable corporations, and private equity firms.
“This is another bite at the apple,” said Joseph Palomino, director of the AZCenter. “Lawmakers are using temporary confusion around tax forms to push through permanent changes that overwhelmingly benefit those at the very top — while everyday Arizonans are left with underfunded schools, strained health care systems, and rising costs that make life unaffordable across the state.”
What’s more: Arizona's illusory $578 million budget cushion is dwarfed by $6+ billion in H.R. 1 tax conformity ($1.45 billion alone) and the state’s known funding needs, including child care, K-12 public education, health care, and higher education.
WHAT TAX CONFORMITY MEANS FOR ARIZONANS
Public K–12 education
Tax conformity would further undermine Arizona’s ability to fund public K–12 education, leaving:
- Schools without funding for basic A/C repairs in extreme heat
- Teachers and school staff continuing to be underpaid
- Districts forced to stretch already inadequate resources even thinner
Health care
The bill fails to address critical gaps in Arizona’s health care system, including:
- Long waitlists for people with developmental disabilities
- Seniors receiving fewer caregiving hours than they need
- Children excluded from essential services due to lack of funding
Universities and community colleges
At a time when higher education is key to workforce development, tax conformity means:
- Fewer resources for financial aid for in-state students
- Greater barriers to accessing affordable post-secondary education
- Continued erosion of Arizona’s long-term economic competitiveness
Child care
Tax conformity does nothing to address Arizona’s child care crisis:
- Child care waitlists would remain unresolved
- Providers would continue to be underpaid
- Children in care would not receive high-quality services
- Parents would struggle to work and afford basic necessities
- More providers would be forced to close, reducing options for all families — even those not receiving assistance
WHO BENEFITS — AND WHO DOESN’T
HB 2785 also includes an amendment that extends a corporate tax break for large multinational corporations. The amendment allows companies to continue excluding certain foreign income from Arizona’s tax base — a provision originally designed to curb corporate profit shifting.
By keeping this loophole in place, Arizona stands to lose billions in corporate tax revenue, primarily benefiting multinational corporations with assets exceeding $2.5 billion.
Despite claims of broad relief, tax conformity primarily benefits wealthy households and large corporations: Expansions of state and local tax deductions overwhelmingly benefit those earning over $200,000.
Business tax provisions favor large partnerships, private equity, and profitable corporations — potentially tied to activity outside Arizona. Wealthy taxpayers and corporations typically extend their tax filings, meaning the urgency argument does not match reality.
“Tax cuts are not magic beans,” Palomino said. “They don’t pay for themselves, and they don’t magically grow the economy. Arizona has already tried this experiment — and the result has been decades of underinvestment.”
A QUESTION OF PRIORITIES
If Arizona were to conform to federal tax law, lawmakers would still need to find a way to pay for it. Instead, this bill locks in permanent costs while Arizona’s budget outlook remains uncertain — leaving families to pay the price through reduced services.
“We need revenue to rev up Arizona’s economy,” Palomino said. “Not policies that put it in neutral while pretending the math will somehow work itself out.”
