Tax Conformity Explained: Why Arizona Can’t Afford It 

Arizona lawmakers are considering various ways to conform the state’s tax code to federal H.R. 1, the Trump administration's tax law. The most recent iteration of that effort includes two identical bills, HB 2785 and SB 1638, which would lock Arizona into major, permanent tax changes tied to federal law beginning Jan. 1, 2026, and some of which are retroactive to 2025.  

Tax conformity may sound technical, but its consequences are anything but. At its core, conformity is not a paperwork issue — it is a budget decision. that determines  whether Arizona has the revenue it needs to fund schools, health care, child care, and higher education. 

What is tax conformity?  

Tax conformity occurs when a state adopts changes made to the federal tax code. In some cases, this can make filing taxes simpler. But it can also mean states adopt federal tax cuts without fully weighing whether they can afford the revenue loss. 

When Congress cuts taxes, the federal government can absorb those losses through deficit spending. States cannot. Arizona must balance its budget every year — which means lost revenue inevitably shows up as underfunded public services. 

Why this matters now 

Right now, conformity would mean Arizona adopts major federal tax changes that are expected to reduce state revenue by about $1.45 billion over the next several years. At the same time, Arizona already has billions in unmet funding needs.  

Simply put, these bills spend money Arizona doesn’t have. 

A budget decision — not a filing issue 

Tax conformity isn’t just about paperwork or simplifying tax forms. It is a budget decision. When revenues shrink, the impact shows up in everyday services Arizonans rely on. 

This shows up in real ways across Arizona: 

• K-12 public education: Schools will continue to delaying basic repairs, including air conditioning fixes, while teachers and school staff remain underpaid and difficult to retain.  

• Universities and community colleges: Some Arizona students could go without financial aid or receive inadequate financial aid, making college less affordable and weakening Arizona’s future workforce.  

• Child care: Child care waitlists will not improve. Providers will stay underpaid. Some providers will close. Parents will struggle more to work and afford basic costs for their families.  

Who actually benefits 

The tax savings from these federal changes are likely to go to the wealthy, big corporations, and private equity operating as partnerships.  

While some proponents have framed passing this bill as an administrative necessity to reduce confusion during tax filing season, those who primarily benefit from a State and Local Tax Deduction, or SALT, increase within it are those making over $500,000.  

Each of the tax conformity bills 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 from the corporate income tax base, primarily benefiting multinational corporations with assets exceeding $2.5 billion. 

That means the state loses revenue while most working families see little to no benefit.  

The bottom line  

Tax conformity sounds like a technical tax update. In reality, this version is a large tax cut that mainly benefits the wealthy few and big corporations, while forcing Arizona to spend less on schools, health care, child care, and higher education.  

Arizona needs stable revenue to keep the state affordable and competitive. Locking in permanent tax cuts moves Arizona in the wrong direction.