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ARIZONA STATE SENATE
Fifty-Seventh Legislature, Second Regular Session
VETOED
FACT SHEET FOR H.B. 4152/S.B. 1845
taxation omnibus.
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 individual income tax subtractions, repeals specified tax credits, modifies individual income tax deductions and increases the Dependent Tax Credit. Repeals the requirement for the State Treasurer to divert state transaction privilege tax (TPT) revenues each month to the Rio Nuevo Multipurpose Facility District. Declares the state's election to participate in the federal tax credit for individuals who make qualified contributions to school granting organizations (SGOs) and outlines SGO certification and administration requirements.
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.
Additionally, H.R. 1 establishes the federal tax credit for individuals who make qualified contributions to SGOs that serve elementary and secondary school students. Qualified contributions include various education expenses like tuition, fees, uniforms, transportation, supplies and other expenses. H.R. 1 requires the Governor or another individual, agency or entity authorized by state law to voluntarily elect to participate in the SGO tax credit program in order for Arizona residents to be eligible to receive the federal tax credit (26 U.S.C. § 25F).
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 Arizona Commerce Authority (A.R.S. §§ 41-1507; 43-1074.01; and 43-1168).
In 1999, Tucson voters approved Proposition 400, authorizing the establishment of a development area called the Rio Nuevo Multipurpose Facility District (Rio Nuevo). Rio Nuevo is a tax increment finance district which receives a diversion of state TPT to finance the development of a multipurpose facility and supporting projects. Current statute requires state TPT diversion payments to continue until July 1, 2035, or until all debt service payments are completed, whichever is later (Rio Nuevo; A.R.S. § 42-5031).
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. H.B. 4152 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; and
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.
3. Establishes the following individual income tax subtractions for TY 2025, to the extent not already excluded from Arizona gross income under the U.S. IRC:
a) the amount of qualified passenger vehicle loan interest that is deducted under the federal income tax deduction for qualified passenger vehicle loan interest; and
b) the amount deducted for a qualified senior, who turns 65 years old during the taxable year, under the federal income tax deduction for seniors.
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.
5. Establishes the following individual income tax subtractions for taxable years beginning January 1, 2026, capped at an aggregate amount of $6,000 for a taxpayer who is single, married filing separately or a head of household or $12,000 for a married couple filing jointly:
a) for taxpayers who are at least 60 years old during the taxable year, an amount of up to $6,000 that is distributed from a pension or retirement account, to the extent not already excluded from Arizona gross income or the U.S. IRC; and
b) an amount of up to $6,000 that is contributed to a Roth individual retirement account during the taxable year, to the extent the contributions were not deducted in computing FAGI.
6. Requires the individual income tax subtraction for individuals who are at least 60 years old to be reduced by 6 percent of the amount that the taxpayer's income exceeds the subtraction, if:
a) the taxpayer's Arizona gross income is $75,000 or more and the taxpayer is single, married filing separately or a head of household; or
b) the taxpayer's Arizona gross income is $150,000 or more for a married couple filing jointly.
Individual Income Tax Deductions (Retroactive to January 1, 2025)
7. Replaces the Arizona-specific standard deduction by coupling with the federal standard deduction, including the annual inflation adjustment.
8. 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.
State and Local Tax Deduction (Retroactive to January 1, 2026)
9. 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)
10. 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.
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.
Repealed Tax Credits
12. Repeals the following tax credits:
a) the insurance premium, individual and corporate Credit for New Employment;
b) the individual Credit for Solar Energy Devices;
c) the individual and corporate Renewable Energy Production Tax Credit; and
d) the corporate Credit for Pollution Control Equipment.
13. Applies the repealed tax credits to taxable years beginning January 1, 2026.
Rio Nuevo (Retroactive to July 1, 2026)
14. Repeals the requirement for the State Treasurer to divert state TPT revenues each month to Rio Nuevo.
15. Requires the triannual audit of Rio Nuevo to include a description and the amount of specified payments from the municipality in which the district is located.
TPT (Retroactive to July 1, 2026)
16. Repeals the TPT deduction and use tax exemption for the sale or lease of solar energy devices.
17. Repeals the requirement for solar energy device retailers to register with ADOR.
SGOs
18. Declares that Arizona elects to participate in the federal tax credit for individuals who make qualified contributions to SGOs.
19. Requires ADOR to comply with all federal laws and regulations to administer the federal SGO credit to ensure Arizona is eligible to participate in taxable years beginning January 1, 2027, and to annually submit all required information to the U.S. Secretary of the Treasury for participation.
20. Allows a nonprofit organization in Arizona that is exempt, or that has applied for exemption, from federal taxation to apply to ADOR for certification as an SGO and requires ADOR to certify that the SGO meets the federal requirements and applicable regulations or guidance issued by the U.S. Secretary of the Treasury.
21. Requires ADOR, by January 1 of each year, to:
a) submit to the U.S. Secretary of the Treasury a list of certified SGOs located in Arizona; and
b) post the list on ADOR's official website.
22. Requires ADOR to adopt rules and publish and prescribe forms and procedures necessary to administer SGO certification requirements.
23. Allows, beginning January 1, 2027, an ADOR-certified SGO that is on the list submitted to the U.S. Secretary of the Treasury to provide scholarships to eligible students for any qualified elementary or secondary education expenses to the extent allowed under federal law.
Miscellaneous
24. Clarifies the income included in the income tax subtraction for foreign dividends.
25. Defines terms.
26. Contains a savings clause relating to the repealed tax credits.
27. Makes technical and conforming changes.
28. Becomes effective on the general effective date, with retroactive provisions as noted.
The Governor indicates in her veto message that H.B. 4152, and this version of the FY 2027 state budget as a whole, would cause Arizona to default on its debt obligations, endanger vulnerable children, cut public safety funding and provide tax breaks for billionaires, data centers and special interests. The Governor outlines her specific concerns, including cuts to funding for specified agencies and programs, and invites the Legislature to return to the negotiating table.
House Action Senate Action
APPROP 4/28/26 DP 11-7-0-0 ATT 4/28/26 DP 6-4-0
3rd Read 4/29/26 33-20-7 3rd Read 5/4/26 16-12-2
(H.B. 4152 was substituted for S.B. 1845 on 3rd Read)
Vetoed by the Governor 5/5/26
Prepared by Senate Research
May 7, 2026
MG/ci