With Arizona’s legislative session scheduled to close this week, small business owners are still left in a lurch over a lack of tax conformity.
Twice this year Gov. Katie Hobbs has vetoed legislation that would have provided full conformity in the tax code with the One Big Beautiful Bill Act passed last summer. The governor maintains that the best path forward would not be full conformity, but rather partial.
Gov. Hobbs wanted the Republican-led legislature to get on board with the Democratic minority’s Middle Class Tax Cuts Package.
The Arizona Free Enterprise Club, a free market policy organization, said Hobbs’ preferred conformity package would require Arizonans to file taxes twice and increase taxes by $200 million.
File your taxes twice. Pay more. Welcome to Katie Hobbs’ Arizona.
After vetoing two full conformity bills, Hobbs helped turn what should have been a routine tax update into a full-blown mess in the middle of filing season. Her administration issued forms based on full… pic.twitter.com/eS5n6tiWfm
That threat of double-filing, per Senate President Warren Petersen (R-LD14), has been mitigated because the tax forms sent out by the state aligned with what the Republicans brought to the table (and Hobbs rejected).
Prior to the first veto, the Arizona Department of Revenue issued its advice on filing under the new changes to federal tax law.
Republican leadership in the legislature urged Arizonans to file their taxes, promising to not support any conformity package that would effectively “punish Arizona taxpayers” and require refiling.
“For tax year 2025 we will not support anything that forces Arizonans to refile,” said Petersen.
“Any outcome that requires you to amend your return or pay more is a nonstarter,” said House Speaker Steve Montenegro (R-LD29).
Gov. Hobbs justified her vetoes under the claim that Trump’s One Big Beautiful Bill would require poorer Arizonans to shoulder more of the tax burden.
“We should not hold tax cuts for over 88 percent of Arizonans hostage in order to force through tax breaks for special interests,” said Hobbs. “Other questions of tax conformity must be decided through budget negotiations, following the precedent set by Governor Ducey.”
Sen. Petersen rejected Hobbs’ view of the federal tax changes.
Petersen dismissed Hobbs’ claim as “a nice talking point” that ignored what he says is the reality of how the federal legislation impacts an overwhelming majority of the state’s business transactions.
“That’s just not true,” said Petersen. “We’re talking about tax on tips, we’re talking about tax on car interest loans, we’re talking about no overtime. These are not rich people. These are small business owners. 90 percent of business transactions are small business owners.”
“It’s a nice talking point, but it’s really not true.”
Arizona Senate President Warren Petersen joined @AZMorningNews to push back on Gov. Katie Hobbs after she vetoed Arizona tax conformity and tax-cut bills tied to federal changes.
Chad Heinrich, Arizona director of the National Federation of Independent Business (NFIB), toldThe Phoenix Business Journal that the lack of conformity will cause increased taxes on over 700,000 small businesses in Arizona. Heinrich blamed Hobbs.
“Not conforming with the key business provisions is, in practical effect, a tax increase on the Arizonans who can least absorb it — those who own and operate Arizona’s small businesses,” said Heinrich. “The Legislature has done its part. Governor Hobbs should finish the job, now, before one more small business owner has to guess about their future.”
AZ Free News is your #1 source for Arizona news and politics. You can send us news tips using this link.
The National Federation of Independent Business (NFIB) released a new report detailing the significant economic benefits and tax savings Arizona’s 706,640 small businesses will realize now that the 20% Small Business Tax Deduction has been made permanent.
The report also outlines additional federal tax relief measures signed into law that will support small business growth across the state.
According to the report, making the deduction permanent is projected to generate 26,000 new jobs annually in Arizona over the next 10 years, along with an annual increase in state GDP of $1.4 billion during the first decade. After 2035, the benefits grow even larger, with an expected $2.9 billion annual increase in state GDP and 49,000 new jobs created each year.
Nationally, the permanent deduction is expected to add 1.2 million jobs and $75 billion to U.S. GDP each year for the first 10 years, rising to 2.4 million jobs and $150 billion in annual GDP growth beyond 2035.
“Making the 20% Small Business Deduction permanent was a landmark win for Main Street — and Arizona small businesses are already seeing that benefit,” stated NFIB State Director Chad Heinrich. “But the conformity fight isn’t over, and every provision Arizona fails to adopt is a tax increase on hardworking small business owners.”
Since 2017, the Small Business Tax Deduction has allowed pass-through businesses to deduct up to 20% of their qualified business income. This relief has enabled small businesses to expand operations, hire more workers, invest in employees, and strengthen their communities. The deduction was originally scheduled to expire at the end of 2025, which would have resulted in a significant tax increase on nine out of ten small businesses.
On July 4, 2025, President Trump signed legislation making the 20% Small Business Tax Deduction permanent. This action provides long-term certainty for small business owners, allowing them to retain more of their earnings to reinvest in their operations rather than sending additional funds to federal and state governments. It also helps level the competitive playing field against larger corporations.
In addition to the 20% deduction, the legislation includes several other key provisions. The Section 179 small-business expense deduction was doubled from $1.25 million to $2.5 million and will now be indexed for inflation, allowing businesses to immediately deduct the full cost of qualifying equipment and property.
The 100% bonus depreciation under Section 168(k) was permanently restored, enabling businesses to fully deduct the cost of qualified property in the year it is placed in service rather than spreading depreciation over many years.
Lastly, the estate tax exemption was permanently increased to $15 million for individuals and $30 million for married couples filing jointly, with inflation adjustments. This change helps family-owned small businesses avoid being forced to sell or liquidate assets to pay taxes upon the owner’s death.
Ethan Faverino is a reporter for AZ Free News. You can send him news tips using this link.
Small business optimism weakened in March as a sharp drop in reported profit trends and softening expectations for business conditions weighed on the outlook, according to the latest survey from the National Federation of Independent Business (NFIB).
The NFIB Small Business Optimism Index fell 3 points to 95.8, slipping below its 52-year historical average of 98 for the first time since April 2025. At the same time, the Uncertainty Index rose 4 points to 92, significantly above its long-term average of 68.
“The 20% Small Business Deduction and other supportive small business tax provisions in the Working Families Tax Cut Act have had many positives for small business owners,” stated NFIB Chief Economist Bill Dunkelberg. “However, the dramatic spike in oil prices has spooked consumers and owners alike. Small business owners are having to absorb those higher input costs and pass them along to their customers.”
Key Declines Drive the Drop in Optimism
The decline in the Optimism Index was driven primarily by two key components: the frequency of reports of positive profit trends, which plunged 11 points to a net negative 25%—the largest contributor to the overall drop—and the net percentage of owners expecting better business conditions, which fell 7 points to a net 11%, marking the third consecutive monthly decline and the lowest reading since October 2024.
Other notable movements included:
Employment Index – Fell from 103.5 to 101.6. While still above the 2025 average (101.2) and historical average (100), the 1.9-point decline signals moderation in labor market conditions.
Capital outlays – Only 16% of owners plan capital investments in the next six months, down 2 points and the lowest level since November 2009.
Sales – A net negative 5% reported higher nominal sales in the past three months (down 6 points), ending four months of improvement. Expectations for higher real sales volumes over the next quarter eased to a net 7%.
Inventory – Plans for inventory investment turned more cautious, reaching a net negative 5%, the lowest since May 2024.
Labor Market and Compensation Trends
Hiring activity showed signs of cooling. A seasonally adjusted 32% of owners reported job openings they could not fill (down 1 point), though this remains well above the historical average of 24%. Skilled worker openings stood at 27%, while unskilled openings rose slightly to 12%.
A net 12% of owners plan to create new jobs in the coming three months, unchanged from February and near the long-term average. Compensation pressures eased modestly: a net 33% reported raising compensation; plans to raise compensation in the next three months fell 4 points to a net 18%—the lowest since July 2025. Despite the declines, both actual and planned compensation remain above historical averages.
Pricing, Supply Chains, and Business Health
Actual price increases ticked up, with a net 25% of owners raising average selling prices (up 1 point and well above the historical average). Planned price hikes, however, declined 4 points to a net 24%. Supply chain disruptions affected 62% of owners to some degree (up 3 points), with most reporting only mild or moderate impacts.
When rating the overall health of their businesses, 13% called it “excellent” (up 1 point), 51% “good” (down 4 points), 30% “fair” (up 4 points), and 4% “poor” (down 1 point).
Top Business Problems and Credit Conditions
Taxes remained the single most important problem for 19% of owners (unchanged and still ranked #1), followed by labor quality at 15% (#2), and inflation at 14% (#3).
Credit conditions stayed relatively stable but tight. The net percent expecting easier credit held at negative 5%, while the average interest rate on short-term loans edged down to 7.9%. Only 24% of owners reported borrowing regularly, a historically low level. Just 11% viewed it as a good time to expand (down 4 points and below the historical average).
“Small business owners are certainly keeping a close eye on the price of oil,” added NFIB State Director Chad Heinrich. “As those cost pressures grow and Arizona’s officeholders dawdle on tax conformity, small businesses are doing everything they can to minimize price increases for their consumers and stay competitive. It’s essential that state policymakers give our small businesses certainty and fully conform with the provisions of the Working Families Tax Cut Act.”
Ethan Faverino is a reporter for AZ Free News. You can send him news tips using this link.
The National Federation of Independent Business (NFIB) March Jobs Report, released earlier this week, shows the Small Business Employment Index declined 1.9 points to 101.6. While the index pulled back from February, it remains above the 2025 average of 101.2 and the long-term historical average of 100.
In March, a seasonally adjusted 32% of small business owners reported having job openings they could not fill, down just 1 point from the prior month but still well above the historical average of 24%. Of those, 27% had openings for skilled workers (down 1 point), and 12% had openings for unskilled labor (up 2 points).
“While small businesses are not hiring extensively, they continue to face difficulties related to labor cost and quality,” stated Chief Economist Bill Dunkelberg. “Despite the current stagnant employment growth, economic conditions could change rapidly.”
NFIB State Director Chad Heinrich added, “The numbers tell a clear story — small businesses want to hire, but qualified applicants are hard to find. Add the uncertainty around tax conformity, and owners simply can’t plan with confidence. Inaction at the Capitol has a real cost.”
A seasonally adjusted net 12% of owners reported plans to create new jobs over the next three months, unchanged from February and near the historical average of net 11%. Overall, 52% of owners said they were hiring or trying to hire in March, down 2 points from the previous month.
Among those attempting to hire, 45% reported few or no qualified applicants for the open positions, down 1 point from February. Specifically, 22% reported few qualified applicants (down 3 points) and 23% reported none (up 2 points).
Labor quality remained a top concern, with 15% of small business owners citing it as their single most important problem—unchanged from February and above the historical average of 12%. This marks the first time since December 2016 that labor quality has consistently registered at or above 15%. Meanwhile, 10% of owners identified labor costs as their top problem, up 1 point from February.
On the compensation front, a seasonally adjusted net 33% of owners reported raising worker pay in March, down 1 point from February. Looking ahead, a net 18% plan to increase compensation over the next three months, down 4 points from the prior month and the lowest reading since July 2025. Despite the recent softening, both actual and planned compensation levels remain above their historical averages.
“Employment growth has stagnated, as hiring plans continue to slide toward the historical average,” the report noted. Job openings have reached their lowest levels since the recovery from the COVID-19 recession.
Ethan Faverino is a reporter for AZ Free News. You can send him news tips using this link.
The National Federation of Independent Business (NFIB) Arizona issued a policy statement this week urging state lawmakers to prioritize tax certainty for small businesses in the upcoming legislative session.
In a press release, NFIB Arizona urged Arizona policymakers to “take action and align Arizona’s income tax code with the small business provisions that are permanent in federal law,” and consider tax policy changes this year. The group argued that stable and predictable tax policy is essential for small businesses to plan, invest, and grow.
NFIB Arizona also highlighted concerns about potential tax increases and shifting tax policy, emphasizing that uncertainty in state taxes could discourage investment and expansion by small businesses across Arizona. The organization represents thousands of small business owners in the state.
Small businesses are actively operating in 2026 without having the certainty needed to make investments now. https://t.co/VuePgL8yed
In its release, NFIB Arizona pointed to the Arizona House and Senate GOP plan to protect taxpayers during the filing season, stating that lawmakers should avoid policies that could lead to higher costs or an unstable tax environment for small business operators.
“It’s good to hear that the legislative majority has the back of small business and will not allow for a surprise tax increase for the 2025 tax year,” NFIB State Director Chad Heinrich said in a statement. “That’s great for 2025, which is in the books.”
He added, “Small businesses are actively operating in 2026 without having the certainty needed to make investments now. We will continue to urge lawmakers to take action and align Arizona’s income tax code with the small business provisions that are permanent in federal law so that Main Street can operate and grow their businesses with certainty.”
NFIB Arizona’s statement follows an ongoing debacle at the Arizona State Capitol over the state’s conformity with 2025 federal tax changes between the Republican-led legislature and Democrat Governor Katie Hobbs. Hobbs vetoed a Republican bill, HB 2785, which would have brought Arizona’s income tax law into full conformity with the federal Internal Revenue Code on Feb. 12. The group said tax certainty would help small businesses make long-term hiring and investment decisions.
At the time, the NFIB wrote in a statement, “Twice, the Legislature has taken responsible action to protect hardworking Arizonans from tax uncertainty. Twice, Governor Hobbs has chosen political gamesmanship instead—turning something as mundane as tax conformity into a partisan game.”
