I don't read that in their tax code.

This, from the Summary of Arizona Taxes:

Subtractions in arriving at Arizona taxable income include interest income received from United States government obligations, Social Security income received under Title II of the Social Security Act, and railroad retirement benefits received from the Railroad Retirement Board under the Railroad Retirement Act. Arizona also allows a subtraction of up to $2,500 for U.S. Government civil service and military pensions and Arizona state or local pension income. Public retirement pensions from states other than Arizona do not qualify for this subtraction.

Here's the full text: