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ARIZONA STATE SENATE
Fifty-Seventh Legislature, Second Regular Session
taxation; omnibus; 2026-2027.
Purpose
Conforms Arizona tax statutes to the U.S. Internal Revenue Code (U.S. IRC) as of January 1, 2026, to reflect changes adopted by the U.S. Congress during 2025. Establishes income tax subtractions and additions, repeals, increases and modifies specified tax credits and modifies individual income tax deductions. Prohibits the Arizona Commerce Authority (ACA) from accepting applications for, and granting tax relief to, any new computer data center between July 1, 2026, and June 30, 2029. Increases the aggregate cap on the amount of state prime contracting transaction privilege tax (TPT) revenues that must be paid to cities, towns and counties for public infrastructure improvements for the benefit of a manufacturing facility and modifies the public infrastructure project funding apportionment and minimum capital investment. Modifies property tax exemptions and exemption requirements for veterans with service- or nonservice connected disabilities and their surviving spouses. Requires Pinal County transportation excise tax monies remaining after refunding certain taxpayers to be held until appropriated by the Legislature.
Background
The Arizona Legislature periodically updates the statutory definition of the U.S. IRC to include any federal provisions that became effective in the preceding calendar year as a means of paralleling the computation of Arizona income tax and other statutory references throughout the Arizona Revised Statutes to the amended U.S. IRC. Tax conformity with the U.S. IRC is deemed necessary because the calculation of Arizona corporate income tax liability begins with federal taxable income. Similarly, federal adjusted gross income (FAGI) is the starting point for individual income tax assessment.
On July 4, 2025, major federal tax changes were enacted through H.R. 1, commonly referred to as the One Big Beautiful Bill. Due to tax code conformity, these federal changes have the potential to impact state revenues. H.R. 1 includes changes that impact federal taxable income and FAGI, which the state could conform to by updating the statutory definition of the U.S. IRC (standard conformity). However, H.R. 1 also includes provisions that are not automatically incorporated when updating the definition of U.S. IRC.
The individual and corporate Research and Development Tax Credit is
allowed against income tax liability for increased research activities
conducted in Arizona, including research conducted at a state university that
is funded by the taxpayer. The Research and Development Tax Credit is
nonrefundable or refundable up to the aggregate statutory cap. The
nonrefundable portion of the Research and Development Tax Credit is
administered by the Arizona Department of Revenue (ADOR) and the refundable
portion is administered by the ACA (A.R.S. §§ 41-1507;
43-1074.01;
and 43-1168).
In 2013, the Legislature established the Computer Data Center Program, which is operated by the ACA in conjunction with ADOR. A computer data center is a facility that is predominately used to house working servers for one or more businesses or owners. To qualify for the statutorily prescribed tax relief, a qualified computer data center must submit: 1) an application for certification and receive a letter of certification from the ACA; and 2) a signed affirmation that the computer data center will satisfy the applicable capital investment threshold (A.R.S. § 41-1519).
From October 1, 2013, through September 30, 2033, the State Treasurer must pay a city, town or county the total amount of state prime contracting TPT revenues derived from contracts to construct buildings and associated improvements for the benefit of a manufacturing facility for the purpose of funding up to 80 percent of the cost of the public infrastructure improvements. The aggregate amount of state prime contracting TPT revenues paid to all cities, towns and counties for public infrastructure improvements may not exceed $200 million. For a city, town or county to qualify for state prime contracting TPT revenue distributions, the manufacturing facility must agree to make a capital investment of at least: 1) $500 million in a county with a population of more than 800,000 persons; or 2) $50 million in a county with a population of fewer than 800,000 persons.
After receiving a manufacturing facility's sworn certification of the initial investment, the city, town or county must enter into an agreement with ADOR that includes specified public infrastructure project and funding information. On notification by ADOR, the State Treasurer must cease paying state prime contacting TPT revenues to the city, town or county if: 1) the city, town or county has received 80 percent of the cost of the public infrastructure improvements; or 2) the $200 million aggregate cap has been met (A.R.S. § 42-5032.02).
All property in Arizona is subject to taxation with certain exemptions
outlined in the Arizona Constitution and prescribed by statute. The property of
Arizona residents who are widows, widowers, persons with total and permanent
disabilities or veterans with service- or
nonservice-connected disabilities, or their surviving spouses, are exempt from
property tax subject to the conditions and limitations prescribed by statute.
To qualify for a property tax exemption, a claimant's total income from all sources is subject to a statutory cap which is adjusted for inflation annually. The household's total income from all sources may not exceed: 1) $39,865, for households with no children under 18 years old; or 2) 47,826, for households with children under 18 years old or children with a total and permanent disability. A widow, widower, person with a total and permanent disability or veteran with a service- or nonservice-connected disability must initially establish eligibility for the property tax exemption by filing an affidavit with the county assessor. Each following year, the person must annually calculate income from the preceding year to ensure that the person still qualifies for the exemption and notify the county assessor of any event that disqualifies the person from further exemption (A.R.S. §§ 42-11002 and 42-11111).
In 2017, Pinal County voters approved a transportation excise tax that became effective April 1, 2018. In 2022, the Arizona Supreme Court held that the Pinal County Regional Transportation Authority (Pinal RTA) and the Pinal County Board of Supervisors acted unlawfully when they adopted a two-tiered retail transaction privilege tax on tangible personal property as part of the Pinal County transportation excise tax. Between 2018 and 2024, ADOR collected nearly $87 million in excise tax revenues, which the Pinal RTA deposited into an interest-bearing escrow account (Vangilder v. Arizona Department of Revenue, 252 Ariz. 481 (2022)).
In March 2024, Pinal County, the Pinal RTA and ADOR entered into a memorandum of understanding to refund the excise tax revenues to business taxpayers that paid the excise tax. Eligible businesses had until April 9, 2026, to submit a request to Pinal County for a refund of monies paid plus applicable interest (ADOR; OAG).
According to ADOR, the estimated impact to the state General Fund associated with standard conformity would be a reduction of $369.88 million in FY 2026, $144.57 million in FY 2027 and $154.28 million in FY 2028. S.B. 1861 includes provisions beyond standard conformity related to the FY 2027 state budget (JLBC Budget Bills As Introduced).
Provisions
Conformity (Retroactive to January 1, 2025)
1. Updates the statutory definition of Internal Revenue Code to include all provisions in effect as of January 1, 2026, with the specific adoption of all retroactive effective dates, excluding any changes to the U.S. IRC enacted after January 1, 2026.
Individual Income Tax Subtractions (Retroactive to January 1, 2025)
2. Establishes the following individual income tax subtractions, for taxable years beginning January 1, 2025, to the extent not already excluded from Arizona gross income under the U.S. IRC:
a) the amount of qualified tips received during the taxable year that is deducted under the federal income tax deduction for qualified tips;
b) the amount of qualified overtime compensation received during the taxable year that is deducted under the federal income tax deduction for qualified overtime compensation; and
c) the amount deducted for a qualified senior, who turns 65 years old during the taxable year, under the federal income tax deduction for seniors.
3. Establishes an income tax subtraction for TY 2025, to the extent not already excluded from Arizona gross income under the U.S. IRC, for the amount of qualified passenger vehicle loan interest that is deducted under the federal income tax deduction for qualified passenger vehicle loan interest.
4. Establishes the following individual income tax subtractions, for taxable years beginning January 1, 2026, to the extent not already excluded from Arizona gross income under the U.S. IRC:
a) the amount of a distribution from a Trump Account established pursuant to federal law; and
b) the amount of child and dependent care expenses for a qualifying individual paid or incurred by the taxpayer for the taxable year that exceeds the amount of the federal Credit for Child and Dependent Care Expenses that the taxpayer received.
Individual Income Tax Deductions (Retroactive to January 1, 2025)
5. Increases the standard deduction as follows:
|
Category |
Amount |
|
Single person or married filing separately |
$15,750 |
|
Head of household |
$23,625 |
|
Married filing jointly |
$31,500 |
6. Allows, for taxable years beginning January 1, 2026, a taxpayer that takes the standard deduction to increase the deduction by an amount equal to the total amount of the taxpayer's charitable contributions, rather than up to 25 percent of qualifying contributions, and caps the contributions at:
a) $1,000 for a single person or married person filing separately; and
b) $2,000 for a married couple filing jointly.
Income Tax Additions (Retroactive to January 1, 2026)
7. Establishes an addition to individual and corporate income tax, for taxable years beginning January 1, 2026, for the amount of the special depreciation allowance for qualified production property allowed under the U.S. IRC for the taxable year to the extent not previously added.
State and Local Tax Deduction (Retroactive to January 1, 2026)
8. Allows a taxpayer to deduct up to $10,000 of state and local taxes in lieu of the full amount of the federal itemized deduction for state and local taxes allowed under the U.S. IRC.
Dependent Tax Credit (Retroactive to January 1, 2026)
9. Increases the Dependent Tax Credit from $100 to $125 for each dependent who is under 17 years old at the end of the taxable year.
School Tuition Organization Low-Income Student Tax Credit
10. Reduces, beginning in FY 2027, the annual cap on the corporate and insurance premium Credit for Contributions to School Tuition Organizations for Low-Income Students from $135 million to $110 million.
Research and Development Tax Credit (Retroactive to January 1, 2026)
11. Eliminates the refundable portion of the individual and corporate Research and Development Tax Credit and repeals the related administrative requirements.
Repealed Tax Credits
12. Repeals the following tax credits:
a) the insurance premium, individual and corporate Credit for New Employment; and
b) the corporate Credit for Pollution Control Equipment.
13. Applies the repealed tax credits to taxable years beginning January 1, 2026.
Computer Data Centers (Retroactive to July 1, 2026)
14. Prohibits the ACA, beginning July 1, 2026, through June 30, 2029, from accepting applications for any new computer data center.
15. States that no new computer data centers qualify for statutory tax relief beginning July 1, 2026, through June 30, 2029.
16. Repeals the computer data center tax relief moratorium on July 1, 2029.
Public Infrastructure Improvements
17. Increases, retroactive to July 1, 2026, the aggregate cap on the state prime contracting TPT revenues paid to cities, towns and counties for public infrastructure improvements for the benefit of a manufacturing facility as follows:
a) through June 30, 2027, to a maximum of $250 million;
b) through June 30, 2028, to a maximum of $300 million; and
c) beginning July 1, 2028, to a maximum of $350 million.
18. Applies the increased aggregate cap to all agreements between ADOR and the applicable city, town or county, regardless of when the agreement was entered into.
19. Expands the definition of public infrastructure to include wastewater reclamation, recycling, treatment and storage facilities.
20. Decreases, from 80 percent to 75 percent, the percentage of state prime contracting TPT revenues that must be paid to a city, town or county to fund the cost of public infrastructure improvements for the benefit of a manufacturing facility.
21. Increases the minimum capital investment that a manufacturing facility must make before a city, town or county may qualify for state prime contracting TPT revenue distributions to:
a) $3 billion, rather than $500 million, if the manufacturing facility is located in a county with a population of 800,000 persons or more; or
b) $100 million, rather than, $50 million, if the manufacturing facility is located in a county with a population of fewer than 800,000 persons.
22. Requires eligible requests for public infrastructure distribution payments received by ADOR between June 1, 2026, and the general effective date to be processed and paid beginning on the general effective date, subject to the statutory cap and the prescribed payment requirements.
23. Allows ADOR to continue to receive and process eligible requests for public infrastructure distribution payments after the State Treasurer has ceased payments when the total amount subject to distribution has met the maximum aggregate cap.
24. Requires prime contracting revenues that have not been distributed to the applicable city, town or county to be retained by ADOR and to remain available for distribution when the remaining aggregate cap capacity and amounts are sufficient to process eligible requests for payment.
25. Requires ADOR, when the remaining aggregate cap capacity is zero, to distribute any retained amounts to the state General Fund and to cities, towns and counties as otherwise prescribed by statute.
26. Requires ADOR to process eligible requests for public infrastructure distribution payments during each reporting period in which ADOR closes and reconciles TPT collections.
27. Subjects payment of each eligible request for public infrastructure distribution payments to the availability of prime contracting revenues for the applicable city, town or county.
28. Stipulates that ADOR must instruct the State Treasurer to pay each eligible request for a public infrastructure distribution payment, if the remaining capacity is sufficient to pay all eligible requests on hand.
29. Specifies that an eligible request for a public infrastructure distribution payment that cannot be fully paid during a reporting period remains on hand for processing in subsequent reporting periods.
30. Requires ADOR, if the remaining aggregate cap capacity is insufficient to pay all eligible requests for public infrastructure distribution payments on hand, to allocate the remaining capacity among the eligible requests for payment on a pro rata basis, as prescribed.
31. Specifies that a city, town or county that has not submitted an eligible request for a public infrastructure distribution payment during a reporting period does not reduce the remaining aggregate cap capacity available to cities, towns and counties that have submitted eligible requests for payment during that reporting period.
32. Requires the agreement between ADOR and the city, town or county where the manufacturing facility is located to state that:
a) the city, town or county will provide at least 5 percent of the actual amount of the construction funding from sources other than the state; and
b) the city, town or county will provide to ADOR an analysis of the anticipated direct and indirect revenues the state will receive as a result of constructing the manufacturing facility.
33. Requires the revenue analysis to include measures relating to the anticipated new jobs to be directly created by the manufacturing facility.
34. Requires ADOR to retain the revenue analysis and allows ADOR to provide the analysis upon request.
35. Specifies that information in the revenue analysis that qualifies as a trade secret or as confidential proprietary information that, if made public, could harm the competitive position of the facility is confidential, is not a public record and may not be disclosed by ADOR.
36. Requires ADOR to post on its website the intergovernmental agreements and development agreements relating to public infrastructure improvement projects
37. Requires ADOR, before posting a development agreement, to:
a) provide the manufacturing facility with a written notice and a reasonable opportunity to designate, within 30 days after receiving the notice, specific information in the agreement that the facility considers to be either:
i. a trade secret; or
ii. confidential proprietary information that, if made public, could harm the competitive position of the facility.
b) redact information designated by the manufacturing facility as a trade secret or confidential proprietary information before posting the agreement, unless ADOR determines after consultation with the facility that the designation is not reasonable under the circumstances.
38. Requires a city, town or county that has entered into an agreement with ADOR to provide ADOR, upon request, with a copy of any development agreement between the city, town or county and a manufacturing facility relating to public infrastructure projects and distributions.
39. Deems development agreement information that is designated and redacted, as outlined, to be confidential, not a public record and prohibits the information from being disclosed by ADOR.
Property Tax Exemptions
40. Exempts, from the full amount of property tax, the primary residence of a veteran with a service-connected disability whose disability status is total disability based on individual unemployability.
41. Exempts the primary residence of a widow or widower who is the surviving spouse of a veteran with a service- or nonservice-connected disability who was eligible for a property tax exemption from property tax in the same amount for which the veteran qualified.
42. Exempts a veteran with a service- or nonservice-connected disability and an eligible veteran's widow or widower from the requirement for the person's household income to not exceed the statutory income cap in order to qualify for a property tax exemption.
43. Includes, in the definition of income from all sources, veterans disability payments due to the disability rating or status of total disability based on individual unemployability.
44. Requires a widow or widower who is the surviving spouse of a veteran with a service- or nonservice-connected disability, when establishing eligibility for a property tax exemption, to provide evidence of the deceased veteran spouse's disability rating or total disability based on individual unemployability to the county assessor.
45. Requires an eligible person, in order for a subsequent primary residence to be eligible for a property tax exemption, to file with the county assessor, within 60 days after the subsequent residence becomes the person's primary residence, a fully completed exemption transfer form as prescribed by ADOR.
46. Applies the modified property tax exemption requirements to tax years beginning January 1, 2027.
Pinal County Transportation Excise Tax (Retroactive to April 10, 2026)
47. Requires all Pinal County transportation excise tax monies that are remaining in the escrow account established to hold those monies or that are being held by ADOR after processing refunds to remain in the escrow account or with ADOR until otherwise appropriated by the Legislature.
Rio Nuevo Multipurpose Facilities District (Retroactive to July 1, 2026)
48. Requires the Rio Nuevo Multipurpose Facilities District Board of Directors to ensure that, from the amount of budgeted income that remains after paying operating expenses and debt service, at least 80 percent of the grants and other financial support provided by the Rio Nuevo Multipurpose Facilities District in a fiscal year is provided for projects that generate TPT revenues.
Unemployment Insurance Operating Fund
49. Requires each employer with an experience rating account, for calendar year 2027, to pay an amount equal to 3.15 percent of the employer's unemployment insurance contributions payable in that calendar quarter to be deposited as follows:
a) a maximum of $8 million in calendar year 2027 in the Unemployment Insurance Operating Fund; and
b) any monies in excess of $8 million in the Unemployment Compensation Fund.
50. Requires the Department of Economic Security (DES) to reduce an employer's contribution by 3.15 percent on a quarterly basis or as otherwise prescribed by law.
51. Establishes the Unemployment Insurance Operating Fund, administered by DES, and consisting of monies collected or received by DES from employers that pay the 3.15 percent of unemployment insurance contributions.
52. Requires DES to use Unemployment Insurance Operating Fund monies to administer the Fund and to pay administration expenses for the federal-state Unemployment Insurance Program.
53. Allows the Director of DES to transfer all or a portion of Unemployment Insurance Operating Fund monies to the Unemployment Compensation Fund.
54. Requires the State Treasurer, on notice from DES, to invest and divest Unemployment Insurance Operating Fund monies and requires monies earned from investment to be credited to the Fund.
55. Specifies that Unemployment Insurance Operating Fund monies are continuously appropriated and exempt from lapsing.
56. Repeals the Unemployment Insurance Operating Fund and the related requirements on January 1, 2028.
Miscellaneous
57. Clarifies the income included in the income tax subtraction for foreign dividends, retroactive to January 1, 2025.
58. Defines terms.
59. Contains a savings clause relating to the repealed tax credits and the modified public infrastructure improvements program.
60. Makes technical and conforming changes.
61. Becomes effective on the general effective date, with retroactive provisions as noted.
Prepared by Senate Research
June 9, 2026
MG/hk