Arizona taxpayers face potential filing complications as a partisan dispute over state tax conformity remains unresolved with less than two months until the April 15 deadline. Governor Katie Hobbs vetoed a Republican conformity bill February 12, marking the second such veto this session and leaving roughly one million filers uncertain whether they’ll need to amend their returns later this year.
The standoff centers on House Bill 2785, which would align Arizona’s tax code with federal changes enacted through HR1, known as the “One Big Beautiful Bill.” Despite the veto, the Arizona Department of Revenue has already issued tax forms assuming full federal conformity, creating a mismatch between official forms and state law.
The Forms Are Ready, the Law Isn’t
Republicans are urging Arizonans to file now using the department’s existing forms, which incorporate federal provisions including no tax on tips and overtime, enhanced business deductions, and expanded child tax credits. The forms were prepared under executive order in November 2025, before legislative action on conformity bills.
“This Legislature will not send a bill that forces Arizonans to file a paper copy of amended returns this year,” House Speaker Steve Montenegro said at a February 18 press conference. “As far as we’re concerned, the forms published by the governor’s own Department of Revenue must be supported by all.”
The department warned that failure to align state law with the forms could force approximately one-third of filers to submit paper-only amended returns later. Arizona’s e-filing system doesn’t support amended returns, meaning affected taxpayers would face additional costs and processing delays.
What Full Conformity Would Mean
Full conformity to HR1 would cost Arizona an estimated $441 million in general fund revenue for the upcoming fiscal year. The federal law extends Trump-era tax cuts and adds new provisions that Republicans argue deliver $1.1 billion in total tax relief to Arizona families and businesses.
Senate President Warren Petersen defended the revenue impact. “We are delivering $1.1 billion in tax relief and ensuring taxpayers do not have to amend returns,” he said in a statement. Republicans claim the state has sufficient cash balances to absorb the revenue reduction without budget cuts.
Arizona typically conforms to federal tax code changes annually to simplify filing and administration. The state’s income tax system uses federal adjusted gross income as a starting point, making conformity the default approach unless lawmakers actively decouple specific provisions.
This year’s process broke down when partisan disagreements over which federal provisions to adopt collided with broader budget negotiations. Republicans fast-tracked Senate Bill 1106 early in the session, which included conformity plus additional state-level provisions like increased child care deductions and retirement income relief. Hobbs vetoed that measure in late January.
The Governor’s Alternative Approach
Hobbs supports a competing “Middle Class Tax Cuts Package” outlined in House Bill 2531 and Senate Bill 1203. Her approach would partially conform to HR1 by adopting middle-class provisions like no tax on tips and overtime while decoupling from broader federal changes she characterizes as favoring wealthy taxpayers and corporations.
“Governor Hobbs’ veto, mixed signals, and her lack of leadership have created confusion,” Petersen said, criticizing the governor’s position.
In her veto letter, Hobbs indicated she’s not opposed to conformity but wants Republicans to explain how they’ll pay for it in the state budget. House Minority Leader Oscar De Los Santos echoed this concern during floor debate on HB 2785. “The Republicans have no plan to pay for this tax cut for the wealthy and large corporations,” the Laveen Democrat said.
The governor’s office did not respond to requests for comment from the Arizona Capitol Times or provide additional details on her budget expectations.
Small Business Uncertainty
Business groups are pressing for resolution before tax season advances further. Chad Heinrich, state director for the National Federation of Independent Business, warned that uncertainty threatens Arizona’s small business community.
“Governor Hobbs’ own Department of Revenue has warned that failing to align could force as many as one-third of filers to submit amended returns,” Heinrich said. “Small business owners need certainty in the state’s tax code now.”
Business groups said the conformity dispute creates planning challenges for hiring, expansion, and quarterly tax payments, particularly for smaller firms. Many business owners make first-quarter decisions based on expected tax treatment, and the current uncertainty complicates those calculations.
Representative Justin Olson, the Mesa Republican who sponsored HB 2785 and chairs the House Ways and Means Committee, framed the issue as a matter of basic taxpayer fairness. “If the Governor fails to sign this bill, a million Arizonans will be forced to amend their returns,” he said. “Taxpayers deserve better.”
Budget Negotiations Ahead
All members of the House and Senate Republican caucuses signed a letter to Hobbs stating that full conformity is their only acceptable position during budget negotiations. The Legislature typically passes Arizona’s annual budget in May or June, well after the April 15 filing deadline.
Senator J.D. Mesnard offered a pragmatic assessment of the situation. “If we do nothing, conformity continues and taxpayers can file,” the Chandler Republican said. “It’s not the ideal arrangement, but we’re operating in the continuing of bad options.”
Kevin McCarthy, director of the Arizona Tax Research Association, suggested after the first veto that there may be little immediate action on conformity. The organization analyzes state tax policy and advises on fiscal matters.
Arizona’s tax code generally incorporates federal definitions unless lawmakers enact changes. Officials and tax policy groups said the lack of a signed conformity bill alongside forms already issued has created uncertainty for administration and compliance.
If lawmakers eventually pass a conformity bill that matches the department’s forms, taxpayers who filed early using those forms would avoid amendments. If the final legislation differs significantly from the forms, however, those who filed early could face unexpected tax bills or refunds requiring paper amendments.
What Filers Need to Know
Republicans, business groups, and the Department of Revenue have urged filers to monitor updates while the conformity dispute continues. The department’s current forms are available online and reflect the federal provisions included in HR1.
Tax professionals said the impact of any later legislation would depend on whether a final bill matches the assumptions built into those forms. If legislation differs, some taxpayers could need to file amended state returns, which in Arizona are submitted on paper.
The practical impact varies by taxpayer. Those who would benefit from HR1’s provisions—including workers who receive tips, families with children eligible for enhanced credits, and small business owners claiming expanded deductions—have the most at stake in the conformity debate.
Democrats argued that full conformity would deliver larger dollar-value benefits to higher-income taxpayers and corporations, while Republicans said the provisions would provide broad relief and simplify filing. Middle-class families would receive more modest but still meaningful relief under either approach.
The standoff continues with no clear resolution in sight before tax day. Budget negotiations typically intensify in late spring as the fiscal year-end approaches, meaning taxpayers may not have clarity until after they’ve already filed their returns.
Source
Republicans urge taxpayers to file 2025 returns despite vetoed tax bill | Arizona Capitol Times