Arizona’s Conformity Decision

In the decision about whether to conform to the tax changes of the One Big Beautiful Bill Act (OBBB), Arizonans must consider the impact of such policies on the state’s economic competitiveness. Among other major pro-growth changes, the OBBB made changes to how businesses calculate taxable income, allowing them to receive the full tax benefit of investing in property, equipment, machinery, and research in the year in which the investment is made, rather than waiting for those costs to be amortized over several years. By allowing businesses to get the full tax benefit up-front, it is less expensive for them to make investments that create jobs and increase productivity. It conforms businesses’ tax burdens closer to cash realities rather than accounting constructs in a pro-growth way.

An example of one of these provisions is first-year expensing of “Research and Experimentation” costs. Since 2022, money that businesses spend researching new technologies and developing new products has been amortized over 5 years. The OBBB allows them to expense the full cost immediately. It is a policy that helps the United States remain an economic and technological leader, making it easier for American companies to remain at the forefront. Many states, though, have already rejected conformity on Research and Experimentation, meaning their businesses will not receive the favorable treatment of these expenses on state taxes.

The tax code has historically penalized investment by requiring businesses to spread deductions across many years, resulting in a reduction of value over time. Full immediate expensing corrects this by letting businesses deduct what they spend in the year they spend it. With this correction, more investments are made, more equipment is purchased, more facilities break ground, and companies can grow more quickly.

Meanwhile, states are generally conforming to the personal income tax provisions from the OBBB. These changes put money back in the pockets of specific groups of taxpayers, like seniors and those working for overtime or tips. They represent a tax cut, but are only part of the full impact of the tax bill. States can realize the full economic benefit by incorporating the corporate provisions as well. The latter help increase investment, leading to growth and ultimately a more competitive economy.

In Arizona, the Joint Legislative Budget Committee estimates full conformity to the OBBB corporate tax provisions will amount to a tax cut of about $420 million through fiscal year 2029. It is a critical $420 million for the state’s economy, as it represents the money businesses are spending to invest in the future of the Grand Canyon State. To the extent that those investments create new jobs or increase wages, these tax provisions can increase revenue from other taxes and offset their own cost. The bill’s fiscal note states that it “does not address the dynamic impacts of this legislation on the broader economy.”

This corporate tax reform does not simply accrue to the benefit of “businesses.” It cannot be repeated too often that businesses do not pay taxes, people pay taxes. In other words, the cost of the tax to the businesses must be passed along to either the owner, in lower returns on capital, the worker, in lower wages, or the customer, in higher prices. Studies generally estimate that it is some combination of all three; one from the Minnesota Department of Revenue, for example, estimates that 47%—the largest share—of that state’s corporate taxes are ultimately paid by its consumers. As such, it is reasonable to assume that much of the foregone revenues from OBBB conformity in Arizona will be passed on to residents. And the benefits will be felt throughout the economy as businesses grow and invest in the state.

Arizona has been one of the fastest growing states in the nation, home to a prosperous economy that is the envy of many others. From 2015 to 2024, more than 600,000 Americans, on net, “voted with their feet” and moved to Arizona on net. The state has also had the 5^th fastest GDP growth and job growth over that same period, ranking 2^nd for Economic Performance in the latest Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.

The Grand Canyon state was one of the leaders in the 2022 Flat Tax Revolution, which many states have since emulated. Its growth is partially a result of its leading the way on pro-growth policies. In 2019, Arizona gained a leg up by conforming to the changes made by the 2017 Tax Cuts and Jobs Act, ad using windfall revenues to reduce income taxes and increase the standard deduction. In 2021, to increase competitiveness during the COVID-19 pandemic, Arizona conformed to net operating loss and interest expense deduction provisions from the federal CARES Act, thanks to the leadership of Senate President Pro Tem Vince Leach.

While some states have chosen to reject federal conformity and increase taxes on business investment, Arizona can lead the way by incorporating the OBBB corporate tax provisions at the state level.