Kavanagh, Petersen Lead 2026 Budget Battles

As Arizona lawmakers gavel in the 2026 legislative session on Jan. 12, they’re walking straight into a familiar mess: big promises, tight money, and an election-year pressure cooker. 

The loudest early concern is tax conformity—whether Arizona should fully align its tax code with the federal “One Big, Beautiful Bill Act.” Republican leaders want full conformity, a move estimated at $440 million next fiscal year (and far more over the next few years), while Gov. Katie Hobbs is pushing a narrower, “middle-class” version. That price tag collides with the reality that lawmakers still have to craft a workable state budget.

Senate Majority Leader John Kavanagh put it bluntly: even doing “half conformity” leaves lawmakers “scraping around for a few hundred million.” Senate President Warren Petersen signaled Republicans want to move fast, joking that their tax bill could be “the fastest a bill has ever landed on her desk.” 

Then there’s education funding, where Proposition 123 has returned—again. With Prop. 123 lapsed, the state has been backfilling roughly $300 million from the general fund, and stakeholders are pushing for a renewal plan that can actually survive the Capitol’s partisan math (and possibly go back to voters). Hobbs calls Prop. 123 renewal “a top priority,” arguing it can deliver more dollars to public schools “without costing taxpayers anything.” 

Lawmakers are also staring down Arizona’s affordability squeeze—especially housing. Petersen warned that the state has “basically outlawed starter homes,” citing delays and barriers that drive up costs. And on water, Hobbs is backing new funding mechanisms, like a data center water fee tied to conservation. 

Put it all together, and the core concern is simple: how do you cut taxes, fund schools, and invest in water and housing—without blowing up the budget—while everyone is campaigning?