Sixty-five Arizona business and industry heavyweights have lined up against Gov. Katie Hobbs, asking her to rethink plans to roll back tax breaks for data centers and to hit the industry with new water fees. Their letter, sent this week, sets economic-development advocates and local suppliers against a governor who has built her 2026 budget pitch around water security and affordability. Both sides insist they are trying to protect Arizona jobs and scarce water, yet they are miles apart on how to get there.
According to the Phoenix Business Journal, the letter urges Hobbs to pull back on two key proposals: eliminating the state sales-tax exemption for qualifying data-center equipment and imposing new water-use fees on the industry. The Business Journal reports that the 65 signers warned abrupt changes could slow construction, squeeze local contracting work, and spook related investment. Their push lands just as Hobbs is trying to move the measures to the top of the legislative to-do list.
Hobbs folded both ideas into her FY2027 executive budget and previewed them in her Jan. 13 State of the State address. Her office has framed the plan as a way to seed a new Colorado River Protection Fund and claw back roughly $38.5 million a year the state currently forgoes, arguing that data centers should “pay their fair share,” according to a news release from the Office of the Arizona Governor. The proposal is part of a broader affordability package that would redirect revenue toward housing and utility relief.
Business leaders warn of a competitiveness hit
Business leaders who spoke with the Business Journal say pulling long-standing incentives while layering on water fees could knock Arizona down a few spots on the shortlist for major data projects, which typically shop several states before committing to a site. The coalition credits predictable policy and clear incentives with driving the state’s recent wave of data-center construction and expansion. Rapid shifts, they argue, could send new builds, and the construction and supplier jobs that come with them, across state lines. That concern anchors the case they are making in their letter to Hobbs.
Price tag and political math
Supporters of repeal point to how quickly the program’s cost has climbed. State figures show the exemption cost about $38.5 million in fiscal 2025, up from roughly $1.4 million in 2020, and analysts warn it could keep growing. At the same time, coverage of the budget fight notes that unwinding the incentive will not be easy politically. Repeal would be difficult to secure this session because, Axios reports, lawmakers would likely face supermajority requirements and complex bargaining as they consider any change.
The debate is not hypothetical at the Capitol. A repeal bill is already on file in the House: legislative tracking shows House Bill 2631, introduced in January and sponsored by Rep. Lorena Austin, would end Arizona’s computer data-center tax relief program entirely. The bill is parked in committee with limited movement so far. The text and status are available on LegiScan.
Local fights have sharpened the debate
Neighborhood-level battles have helped shove the issue onto the statewide stage. Municipal resistance, including Chandler’s recent decision to reject rezoning for a proposed data-center campus and Tucson’s moves to require stricter review of large water users, has pushed water use and local impacts to the center of the conversation. That context, highlighted in reporting by the Associated Press, helps explain why Hobbs paired a new water fee with her broader tax proposal.
What happens next will come down to committee hearings, floor votes and how hard business groups and local officials press their cases in public testimony and private meetings. For anyone trying to track the fallout, legislative movement will be the clearest tell. HB 2631’s progress is updated on LegiScan, and observers expect both industry lobbyists and city leaders to work the process heavily in the weeks ahead.
