There is a particular kind of self-inflicted wound that only governments seem capable of producing. It happens when policymakers stare at a static spreadsheet, see a number they don’t like, and conclude that the economy outside their window will hold perfectly still while they decide what to do about it.
Arizona is in the middle of one of those moments right now.
The federal One Big Beautiful Bill Act made permanent a suite of business expensing provisions that Congress, on a bipartisan basis over multiple administrations, has long understood to be among the most pro-investment tools in the tax code. Bonus depreciation. Section 179 expensing. Immediate deductibility of research and development under Section 174. These are the provisions that determine whether a Phoenix manufacturer buys the new delivery truck this year or next, whether a Tucson software firm hires three more engineers or outsources the work, whether a Flagstaff contractor expands the fleet or coasts another season on aging equipment.
Arizona’s Legislature now has to decide whether to conform our state tax code to those federal provisions. The answer should be obvious. Instead, we are once again watching the conformity debate get strangled by a fiscal note.
Let me describe the problem plainly. The revenue loss estimates being circulated at the Capitol are products of static modeling — the kind of analysis that assumes Arizona’s 700,000-plus small businesses will make exactly the same purchasing, hiring, and investment decisions whether the state conforms to federal law or decouples from it. Taxpayer behavior is held constant. Capital is assumed to sit politely in place. Compliance costs are treated as if they don’t exist. The economy, in other words, is curated like a museum exhibit — preserved behind glass, lit from above, frozen in the pose the modelers found convenient.
That is not the Arizona economy I represent.
The Arizona economy I represent is a working economy. It is messy and reactive and full of decisions that get made in real time, in response to real incentives. When you tell small business owners they have to maintain one depreciation schedule for their federal returns and a different one for their state returns, in perpetuity, they do not shrug and absorb the cost. They pay their accountants more, they invest less, and — if they are sizing up a new facility — they take a hard look at states that have stayed in step with the federal code and offer lower compliance burdens.
None of that shows up in the fiscal note. It is, by design, invisible to a museum economy.
What the Static Estimate Actually Shows
Here is where the museum-economy critique stops being abstract. The September 2025 JLBC fiscal estimate of OBBBA conformity puts a price tag on each of the three small business expensing provisions Arizona is debating. Read them carefully:
Look at what those rows are telling you. The estimated impact of bonus depreciation falls from $31.8 million in FY 2026 to $15.2 million in FY 2028 — a 52 percent decline in two years. R&D expensing falls from $50.5 million to $20.7 million, a 59 percent drop. The three provisions together drop from $92.3 million to $42.9 million — a 54 percent decline over three years on permanent provisions that, by federal statute, are not going anywhere.
Why is the supposed revenue loss shrinking so fast on a permanent law? Because these expensing provisions are timing differences, not permanent revenue reductions. When a business deducts the full cost of a piece of equipment in year one rather than spreading it across seven, the state collects less tax in year one and more tax in years two through seven. Over the useful life of the asset, the math substantially evens out. The decay curve in JLBC’s own table is the recapture starting to show through. Extend the table out another five or six years and the annual “loss” continues to shrink toward zero.
The Legislature is being asked to make a permanent decoupling decision based on a front-loaded fiscal note that already, on its own page, predicts its own dissolution. That is the museum economy at work: it sees the exhibit, not the cycle.
This Is Not the Budget Fight
It is also worth being clear about what these three provisions are, and are not, in the context of the broader conformity package. The total OBBBA conformity package JLBC scored carries a $438.3 million FY 2026 estimate. The three small business expensing provisions account for $92.3 million of that — roughly 21 percent. The headline conformity number is being driven by individual taxpayer provisions — SALT, the new senior deduction, the tips and overtime exclusions, and the standard deduction increase — none of which are what the small business community is asking the Legislature to address.
There is also a structural difference between the expensing provisions and the rest of the package that the static fiscal note quietly reveals. The three expensing provisions decline 54 percent in estimated cost between FY 2026 and FY 2028 — the natural recapture curve of timing-difference provisions. The other major conformity items do not follow that pattern. The standard deduction increase grows year over year. The senior deduction holds essentially flat. The auto loan interest deduction nearly doubles in cost over the same window. And several of the largest individual taxpayer provisions are scheduled to sunset before 2030 — a sunset that history suggests will be extended, at which point their static cost estimates will need to be rewritten in the wrong direction. The expensing fight Arizona is having is the only piece of the conformity package whose own fiscal note predicts its declining cost over time.
If the Legislature wants to have a serious conversation about the larger conformity package, that is a fair conversation to have. But the three expensing provisions are a discrete, targeted, pro-investment piece of the puzzle — modest in scale, declining year over year, and aimed squarely at the capital decisions Arizona small businesses are making right now. They deserve to be evaluated on their own merits, not held hostage to the fiscal note for unrelated provisions.
The Hidden Cost of Decoupling
Then there is the cost of decoupling itself, which never gets priced. Every Arizona employer maintaining two sets of books, two sets of calculations, two sets of professional fees pays a compliance tax that benefits exactly no one. It does not fund a school. It does not pave a road. It does not hire a trooper. It is dead-weight loss, year after year, imposed by the state on its own employer base for the convenience of the accounting convention. If we put a fiscal note on that, the conformity debate would be over tomorrow.
I want to be fair to the analysts who produce these estimates. They are doing the work the statute asks them to do, applying the standard methodology of legislative fiscal analysis. The problem is not their competence. The problem is that we have built a fiscal estimating apparatus designed for a world that does not exist — a world of static behavior, frictionless compliance, and obedient capital — and we are using it to make decisions in a world that is none of those things. Capital is disobedient. Compliance has friction. Behavior is anything but static. And when neighboring states match the federal code while Arizona drifts away from it, the consequences are not theoretical. They show up in site selection decisions, in expansion plans, in where the next 200-job manufacturing line gets built.
There is a reasonable critique that comes from the other direction, and I want to address it directly. Arizona has real budget pressures. The general fund is tight. There are legitimate questions about how the state pays for what it has already promised. I am not asking the Legislature to ignore those constraints. I am asking the Legislature to stop pretending that decoupling from federal expensing rules is a free way to address them. It is not free. It transfers cost from the state’s ledger to the books of every small employer in Arizona, and it does so in a way that suppresses exactly the kind of capital investment that produces future revenue.
This is not a hard call. The expensing provisions were designed to drive behavior — to pull investment forward, to make domestic R&D viable for smaller firms, to reward businesses that take the risk of growing. Congress made them permanent because they work. Arizona’s choice is whether to let our employers participate fully in that incentive structure, or to put a piece of state-level sand in the gears of every capital decision made between Yuma and Page.
Two Asks for the Legislature
First, conform on the expensing provisions. Half-measures and single-year fixes simply move the uncertainty into the next session and force every small business in the state to plan around a tax code that may or may not exist in twelve months.
Second, solve 2026 and the out years now. The Legislature has the information it needs to lock in conformity on the expensing provisions for 2026 and forward in this session. Capital decisions are not made one tax year at a time — a small business sizing up a piece of equipment, an R&D commitment, or a facility expansion is looking at a multi-year depreciation schedule and asking whether the rules will hold. Conforming only for 2026 and leaving 2027 and beyond open to debate gives employers a permission slip with an expiration date, which is functionally the same as no certainty at all. Multi-year conformity ends the annual scramble, gives the business community a stable planning horizon, and frees the Legislature from relitigating the same fight every session.
As lawmakers weigh those decisions, it is worth keeping in mind what the available fiscal estimates can and cannot tell them. Static revenue analysis is, by design, a limited tool. It does not capture behavioral response, compliance burden, or the competitive pull of neighboring states with simpler codes. When the estimated cost of a permanent provision shrinks by half over three years on its own page, that decay curve is a reminder of those limits — not a flaw in the analysts’ work, but a feature of the methodology they are required to use. The Legislature does its best work when it reads those estimates with that limitation in mind.
The choice in front of the Legislature is straightforward. We can keep treating tax policy like a still life — frozen and tidy on paper — or we can recognize that small businesses respond to the rules we write. The expensing provisions in federal law are a gift to states with the sense to accept them.
Arizona should accept the gift.