Veridus Advisory: Governor Hobbs Releases FY 2027 Budget Plan

Dear clients:

Today, Governor Katie Hobbs released her fiscal 2027 Executive Budget, a $17.7 billion General Fund spending plan that prioritizes her affordability agenda - including a $236 million tax cuts package.

Governor Hobbs began Friday by vetoing a larger, $440 million tax cut favored by GOP legislators. The sticking point is to what degree Arizona should conform with federal tax code changes adopted last year as part of H.R. 1, aka “the Big Beautiful Bill.” Republican lawmakers prefer to mostly (but not entirely) conform with the feds, while the Governor favors less conformity (resulting in fewer tax cuts). 

The only sure bet: a big headache when filing your tax returns later this year.

Governor Hobbs’ budget proposal relies heavily on three big assumptions: that the State of Arizona will be reimbursed $760 million by the federal government for expenses incurred due to illegal immigration, legislators will refer to the ballot (and Arizona voters will approve) an extension of Proposition 123 for K-12 education; and State revenues from sports betting will increase by over $145 million due to a higher tax assessed on large operations.

Governor Hobbs declared in her budget message that she’s “laser-focused on bringing back an affordable Arizona where our working-class families can thrive again.” Total spending in her FY 2027 plan is virtually flat compared to the current budget adopted last spring, but she proposes a host of new fees and efficiency measures in order to backfill expected federal cuts.  

Highlights of the Executive Budget include: 

• Elimination of $38 million worth of tax incentives for data center development;

• Creation of a $250,000/year household income cap for ESA participants, which the Hobbs administration projects would save the State nearly $90 million;

• Implementation of a 45% tax on large sports betting operations (up from 10%), generating nearly $146 million in added revenue;

• Investment in a nearly $340 million affordability package, including assistance for housing construction, child care, utility payments, and school meal grants.

The GOP-led Legislature is already looking dimly upon Governor Hobbs’ proposed tax and fee increases, as well as ESA reforms. Senate President Warren Petersen (R-Gilbert) said the Governor’s plan “relies on unrealistic revenue assumptions and offers no credible plan for long-term stability,” and House Speaker Steve Montenegro (R-Goodyear) panned the proposal as “a fantasy built on fake revenues and hidden tax hikes.”

Expect a fight, especially with budget negotiations playing out amid an election year with the Governor and every legislative seat on the ballot. The Joint Legislative Budget Committee (JLBC) now expects a $577 million total surplus over the next three years, markedly better than the $67 million surplus projected as recently as October.

Lawmakers and Governor Hobbs must approve a budget plan before the fiscal year ends June 30. There is more urgency attached to the tax conformity question, as Tax Day looms on April 15.

We will keep you informed with the latest developments.

Sincerely, 

The Veridus team