Chad Heinrich makes the case that Arizona should conform to permanent federal small-business tax provisions rather than trading them away in budget negotiations.
Tax Day has come and gone, and more than 33 million small business owners nationwide are benefiting from the Working Families Tax Cut Act, which made the 20% Small Business Tax Deduction permanent last summer. By stopping what would have been one of the largest tax increases in American history, President Trump and Congress delivered long-term tax certainty to Main Street.
Arizona’s more than 700,000 small businesses are feeling the benefit of the federal law on their federal returns — and that matters. An NFIB-commissioned EY analysis projects the permanent 20% deduction will support roughly 26,000 Arizona jobs annually over the first decade and 49,000 jobs annually after 2035, with $1.4 billion in added state GDP each year in the first decade and $2.9 billion annually in the years after. Those gains flow from federal tax certainty, which is now secured.
But the federal law did more than make the 20% deduction permanent, and the other provisions are where Arizona’s state-level decision actually matters. Permanent 100% bonus depreciation, expanded Section 179 expensing, and immediate R&D expensing all require affirmative state conformity to deliver their benefit to Arizona employers. Without that conformity, Arizona businesses cannot fully claim at the state level the expensing and depreciation Congress made permanent at the federal level. That is the conformity debate at the Capitol right now — and it is where the jobs, investment, and certainty are on the line.
To their credit, Arizona Legislature leaders have advanced serious conformity proposals this session. The obstacle has been the governor’s position.
Governor Hobbs has signaled she wants to hold the small business provisions as leverage in broader budget negotiations, while prioritizing populist provisions like no tax on tips, no tax on overtime, and an enhanced senior deduction. Here’s the problem with that trade: the populist provisions are temporary, expiring in 2028, and the tips and overtime deductions already flow through to Arizona filers automatically because our state tax code starts from federal adjusted gross income.
Don’t trade long-term poliicy for short-term relief
The small business provisions the governor is holding back — permanent bonus depreciation, expanded Section 179 expensing, and immediate R&D expensing — are permanent by design and require affirmative state action to deliver. Trading permanent economic-growth policy for temporary consumer relief that is already largely baked in is a bad trade for Arizona.
And the rationale that such provisions’ benefits flow mainly to high-income filers badly misreads who actually claims these deductions. Expensing, depreciation, and R&D provisions are claimed overwhelmingly by operating businesses — the sole proprietors, LLCs, and S-corps that make up the vast majority of Arizona’s employers. Leaving them in limbo isn’t targeting the wealthy. It’s leaving Main Street in a lurch.
I hear it directly from our members. A Cave Creek business owner called the federal law’s expanded expensing and depreciation provisions “critical” — the difference, he said, between modernizing his operation and falling behind competitors. For mom-and-pop shops weighing large equipment purchases, that certainty matters — and without state conformity, that certainty stops at the federal return.
Critics will point to the revenue cost of conformity. That cost is real, but it should be weighed against a state budget that, according to the Common Sense Institute, grew General Fund spending by roughly 40% in just two years following the FY22 surplus. Returning a modest portion of that growth to the small businesses generating Arizona’s economic activity is not fiscally reckless — it is fiscally rational, and it maintains the simpler, more efficient tax environment Arizona employers already operate under.
Every day the Legislature and governor fail to act on conformity is another day Arizona’s small business owners are making investment decisions in the dark. They cannot budget, hire, or plan capital purchases against a tax code that may or may not match the federal one they already file under.
Small businesses employ more than 40% of Arizona’s workforce. They are not asking for a special break; they are asking state government to complete what Congress started, and to do it before the session ends.
Not conforming with the key business provisions is, in practical effect, a tax increase on the Arizonans who can least absorb it, the people who own and operate Arizona’s small businesses. The Legislature has done its part. Gov. Hobbs should finish the job before one more small business owner has to guess about their future.
Chad Heinrich is the Arizona state director of the National Federation of Independent Business and managing partner for Heinrich Public Affairs in Phoenix.