(The Center Square) – Republicans will introduce a state tax plan next week that’s estimated to save Arizona taxpayers $1.1 billion over the next three years.
The plan is designed to align with federal tax reforms made under the One Big Beautiful Bill Act.
Senate President Warren Petersen, R-Gilbert, told The Center Square that the $1.1 billion estimate “reflects nonpartisan fiscal projections based on conforming Arizona’s tax code to recent federal tax reforms and maintaining key provisions that lower taxable income for individuals and families.”
The tax plan’s “largest benefits will go to working and middle-income families, particularly those with children, as well as seniors on fixed incomes and small businesses,” Petersen said.
The plan will not give “special carve-outs,” but rather provide “broad-based relief” for Arizonans, he said, answering The Center Square’s questions by email.
Petersen added that having Arizona’s tax code align with the federal government’s tax code “prevents higher state tax bills caused by federal-state mismatches and keeps Arizona competitive with states like Texas, Nevada, and Utah.”
“By conforming to federal reforms, Arizona reduces compliance costs for families and small businesses, provides certainty during tax season, encourages job growth and investment and keeps Arizona affordable for workers and retirees,” he said.
Senate Finance Committee Chairman J.D. Mesnard, R-Chandler, and House Ways & Means Committee Chairman Justin Olson, R-Apache Junction, will introduce the bills proposing the tax plan: Senate Bill 1106 and House Bill 2153. The legislative session starts Monday.
To align with changes made at the federal level, the state Republicans’ tax plan will remove taxes on tips and overtime pay.
The plan also allows child and dependent care expenses to be subtracted from taxable income.
And the plan lets residents make deductions, based on the federal changes, on income dating back to the start of 2025.
The plan will also allow Arizonans 60 or older to subtract up to $6,000 from their taxable income if the money comes from a pension or a retirement account. This means these individuals can have up to $6,000 in tax-free income in the state.
If a person over 60 is single and earns more than $75,000, the $6,000 retirement threshold is reduced by 6% of their income.
To illustrate, if someone earned $85,000 in income, the person’s reduction threshold would be determined by taking 6% of $10,000 ($600) and subtracting it from $6,000. Thus, this individual’s retirement reduction threshold would be $5,400.
Married people in this age group will see their retirement threshold decrease by the same percentage if they earn over $150,000.
According to Petersen, the difference between Arizona’s tax plan and the federal plan is that “the federal deduction was intended to relieve the tax burden for those receiving Social Security.”
“Arizona does not, and has not, taxed Social Security for a long time,” he noted.
Another deduction allowed under the tax plan would be for up to $6,000 in Roth IRA contributions. This means that if a person contributes $6,000 to a Roth IRA, then Arizona will not tax that income. For married couples who file jointly, the limit is $12,000.
To illustrate, if a person who earns $70,000 contributes $6,000 to their Roth IRA, Arizona would tax the individual at an income of $64,000.
This rule change retroactively takes effect at the start of the 2025 tax year.
The tax plan says that if a person also uses a Roth IRA and retirement distribution, the combined total can’t exceed $6,000.
To help families, the Republican tax plan provides credits that parents can deduct from their Arizona state income tax. The tax credit for a child under 17 would increase from $100 to $125.
This means a family can deduct $125 from their state income tax per each child under 17.
For example, if a family has four kids under 17 and would normally owe Arizona $1,000 for income tax, it can subtract $600 and pay only $400.
“Middle-income and working families will benefit the most, as the credit is available for taxpayers with incomes up to $200,000 for single filers or $400,000 for married filers,” Petersen said.
The tax plan also calls for Arizona to match its standard deduction to the federal one. This means whenever the federal government changes its standard deduction, Arizona’s will always match it.
The Internal Revenue Service says the standard deduction is a “specific dollar amount that reduces the amount of income on which” a person is taxed.
The federal standard deduction for the 2026 tax year is $16,100 and $31,500 for married couples who file jointly.
If the Arizona Legislature passes the Republicans’ tax plan, Petersen said he is optimistic Democratic Gov. Hobbs will “do the right thing by signing the bill when it hits her desk.”
“If not, we will cross that bridge when we get there,” he said.
Republicans hold majorities in both houses, but lack enough seats to override Hobbs’ vetoes. The governor, though, has supported tax reforms.
In November 2025, Hobbs signed an executive order that implemented some of the reforms enacted under the One Big Beautiful Bill Act, including no tax on tips or overtime. Furthermore, she created a deduction for Arizonans 65 and older and increased the standard deduction from $15,000 to $15,750 for single filers and from $30,000 to $31,750 for joint filers.
This week, the Arizona Department of Revenue issued forms that reflect these changes so people can start filing their 2025 income taxes.
House Speaker Steve Montenegro, R-Surprise, said Hobbs “jumped ahead of the law by issuing state tax guidance this week that assumes legislative action.”
Hobbs’ executive order “only deepens confusion,” he said.
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“This kind of unilateral overreach undermines the process and leaves families, tax preparers, and businesses stuck in the middle,” Montenegro said. “The Legislature is moving to restore certainty, respect the separation of powers, and make sure Arizonans have clear, lawful guidance.”
According to Rep. Olson, the Republicans’ tax plan “will enable hardworking Arizonans to keep more of what they earn, so they can more easily provide for the needs of their families.”