Veridus Advisory: AZ Legislature Approves FY 27 Budget

Dear clients:

Today, the Arizona House and Senate approved the FY 2026-27 State budget package with broad, bipartisan votes. The nearly $18.3 billion General Fund spending proposal now moves to the desk of Governor Katie Hobbs for her consideration and anticipated signature. 

The Governor and legislative leaders of both parties announced they had reached a budget deal Tuesday. The breakthrough followed weeks of on-again, off-again negotiations, including 9th Floor’s issuance of a month-long bill moratorium when she was unhappy with the pace of talks. That moratorium was lifted in mid-May.

One of the biggest stumbling blocks involved the question of tax policy and to what degree Arizona would conform with federal changes incorporated in H.R. 1, which President Trump called the “One Big Beautiful Bill.” As part of the budget plan, the State of Arizona would fully conform with federal tax law - which means a $1.45 billion tax cut for Arizona taxpayers over the coming three years, a priority of the GOP caucus.

In addition to the tax cuts, Republican legislative wins include more frequent eligibility checks for AHCCCS and food stamps recipients. The package also maintains spending for Arizona’s ESA program, which the Governor and Democrats have previously targeted.

The Governor and Democrats, meanwhile, are pleased the budget package softens cuts to State agencies (2.5% across-the-board, one-quarter the 10% cut initially favored by Republicans); preserves AHCCCS coverage for 40,000 low-income enrollees; and provides $48 million in childcare assistance; and includes a 3-year pause in tax incentives for new data centers

Among other budgetary highlights, the proposal:

• Represents a 3.1% year-over-year increase in total spending, significantly less than the State’s rise in spending that averaged 5.4% over the last decade;

• Preserves the City of Tucson’s Rio Nuevo economic development program, long considered a boondoggle by Republicans;

• Sweeps $20 million from the Water Infrastructure Finance Authority (WIFA);

• Invests $235 million in food assistance for low-income Arizonans, and funds two years of free school meals for needy students; and

• Provides a one-time, 4% pay stipend for correctional officers.

Notably, the proposal is silent on renewal of Proposition 123 - the ballot measure that funded K-12 education to the tune of roughly $300 million/year. Even without Prop 123, the spending plan fully funds public education.

It is expected that Governor Hobbs will sign the budget quickly. The Senate will return to work Friday morning, though the House’s plans have not yet been announced. Either way, there is little legislative business yet to be completed before the session can be formally adjourned sine die. Whether that comes Friday, next week or later is uncertain at this hour.

We’ll keep you updated with the latest.

The Veridus team