Arizona’s Budget Reset: Lessons from Round 1, Priorities for Round 2 

Arizona’s budget debate is entering a new phase. 

With the Republican proposal vetoed, state leaders now have another opportunity to craft a budget that better aligns with Arizona’s fiscal realities and the needs of its residents. 

Earlier proposals from the governor and legislative leaders offered different approaches to the state’s priorities, particularly when it comes to managing limited revenue and addressing growing costs.  

This analysis examines those proposals to identify where key gaps remain and what policymakers should consider as they move into the next round of negotiations. 

Budget proposals still fall short of what most Arizonans need 

Over the last 30 years, policy choices that cut about $11 billion of revenue have done almost nothing to ease the economic worries felt by most Arizonans. Instead, repeated tax cuts have only made it tougher for the state to invest in public programs and services proven to make life more affordable for Arizonans, including education, child care, housing assistance, health care, and food support.  

Recent tax cuts passed by Congress in H.R. 1 exacerbate the situation by taking more money away from working families and giving it to the wealthy. 

If policymakers truly want to address affordability, Arizona cannot afford to continue reducing the revenue needed to fund essential services and long-term investments. With limited dollars available, the state budget should prioritize making strategic use of existing resources while considering responsible ways to strengthen revenue over time. 

This year’s budget debate reflects those constraints. With only $378 million available General Fund dollars, both proposals relied on difficult tradeoffs and creative funding mechanisms to support priorities. 

The key question moving forward is not simply what each proposal funds, but whether those investments are enough to meet the long-term needs of Arizona families and communities. 

Lessons from Round 1 

The first round of budget proposals highlighted several recurring challenges: ongoing needs funded with one-time dollars, rising costs without sustainable revenue, and growing pressure from recent federal policy changes. As negotiations continue, these issues remain unresolved. 

Formula driven costs 

Both proposals included some funding needed for essential services whose costs require annual adjustments based on growth.  

This means:  

• Health care for individuals with developmental disabilities: The governor’s budget adds $128 million to cover this year’s shortfall while Republicans’ proposal included $97 million. Only the governor’s budget provides the $226 million ongoing cost needs beginning FY2027.  

• Food assistance: Both proposals accounted for the increased state share of SNAP administrative costs required under H.R. 1 — $33 million this year and $44 million ongoing. However, neither proposal accounted for the additional state costs Arizona is likely to face under H.R. 1’s SNAP error rate penalty structure. Arizona’s historic payment error rate has consistently remained above the 6% threshold required to avoid additional cost-sharing penalties. As a result, the state is unlikely to qualify for a $0 cost obligation under the new law. A more realistic budget projection should account for an estimated $139 million additional cost to the state. 

• Public K-12 education: While both proposals fund education, only the governor’s proposal includes a renewal of Proposition 123. Her proposal would reduce the current General Fund backfill by $271 million, allowing for these funds to be allocated to other critical needs. Both budgets added back $37 million for the poverty weight and $29 million for additional assistance. These two items were temporarily cut from the ongoing budget from FYs 2025-2027. Proposals differed when it came to the Empowerment Scholarship Accounts (ESAs) that are part of the K-12 education formula costs. Only the Republicans’ proposal continued to allow this program to grow to the projected 109,000 students, bringing ESAs to a total cost of $1.2 billion. The governor’s plan requires reforms to curb excessive and inappropriate use. ESA costs have grown far beyond initial projections largely because the majority of students added through the 2022 universal expansion — about 61% — did not previously attend public schools. Rather than shifting existing education costs, the expansion created significant new costs for the state’s General Fund. To better target the program toward families with greater financial need, the governor’s proposal would limit eligibility to households earning $250,000 or less annually, an estimated savings of about $90 million. The Republicans’ proposal also opted Arizona into the H.R. 1 Federal Voucher program adding further strain to public school funding. Because school funding follows the student, if more students leave public schools, it will be harder to sustain funding for fixed costs for things like buildings and buses for students who remain.  

One-time ongoing needs 

In the last few years, policymakers have funded several ongoing vital programs and services with one-time money — a bad habit continued in current budget proposals with even fewer items funded than even during the recent budget deficit in FYs 2024-2025.  

Investments (inadequately) included:  

• H.R. 1 support for AHCCCS and SNAP: Only the governor’s proposal includes support to agencies grappling with the implementation of H.R. 1 red tape for the SNAP and AHCCCS/Medicaid programs. Her budget includes one-time funds of $14.4 million for AHCCCS and $16.6 million for SNAP.  A month before H.R. 1 passed, the federal government cut funding used for SNAP and unemployment insurance eligibility workers in Arizona — resulting in more than 400 laid off. Then, SNAP work requirements and the race to obtain a less than 6% error rate began as soon as H.R. 1 was signed in July. While the governor provided $7.5 million in American Rescue Plan Act dollars to hire temporary workers in December, it hasn’t been enough as more than 450,000 Arizonans have lost access to food assistance since July, the highest loss in the nation. The Republicans’ proposal added unfunded mandates for SNAP and Medicaid. Their budget required the Department of Economic Security to lower the SNAP error rate to an impossible 3% and AHCCCS to do quarterly income checks without more funding for staff and other supports. Even worse, it cut DES' budget by $10 million and AHCCCS by $11 million. Similar to H.R. 1, the Republican budget is balanced on Arizonans being cut off from these programs. 
• School buildings: Both budget proposals continue adding one-time funding for school buildings. Republicans’ plan added $183 million, and the governor’s plan adds $93 million with $1.5 billion over three years through a Prop 123 renewal. While the governor’s budget would provide more funding, it’s not entirely clear if it’s sustainable. Yet both are far from what is needed. A recent lawsuit ruling said the state should be investing ongoing funds of more than $400 million. 

• State employee health insurance: The State Employee Health Insurance provides health care to about 136,000 state employees. Since the state swept funding from the Health Insurance Trust Fund (HITF) during the Great Recession, it has experienced shortfalls that have been covered with unsustainable one-time funding. This year, Republican legislators proposed adding a one-time fund of $232 million and increasing employee contributions by 21%. The governor’s budget ensures one-time funding for this year and next of $173 million and $219 million. She also adds $719 million of ongoing funding over the next three years. The state budget should be able to sustainably and fully fund state employee health insurance instead of relying on one-time spending.  

• Child care: Both budget proposals continued the $45 million one-time investment from last year. While this is the highest amount the state has invested in more than a decade, it still falls short from what is truly needed. Due to unexpected federal funding cuts, the $45 million failed to meet its goal of reducing the child care waitlist by 50%. Adding the same amount this year would only maintain the current level of access to the program. Arizona should be investing ongoing funding of $160 million, though the actual amount may be even higher to fully support working families and get the greatest return on investment. 

• School meals: While both proposals included continuing a one-time investment in children who qualify for reduced priced school meals, the Republicans’ plan reduced the traditionally budgeted amount of $3.8 million down to $2 million. This investment should amount to ongoing funding of$4.5 million. Only the governor's budget includes funding for the SUN Bucks program with a small, one-time state investment of $1.8 million for FYs 2026 and 2027, which draws down $157 million in federal funding. SUN Bucks provides food assistance to children during the summer if they qualify for free and reduced-priced school meals. If we truly want to make the best use of our limited General Fund dollars, this investment in children and families should be included in our budget of ongoing funding. 

Investments missing:  

• Housing Assistance: Neither budget included funding for housing assistance nor additional deposits to the Housing Trust Fund (HTF). On the contrary, the Republicans’ budget swept $14.4 million from the HTF. We should be investing at least $50 million in housing assistance to help families avoid or recover from homelessness. 

• Promise Program: Unlike prior years, funding for the Promise Program didn’t appear in either proposal. The Promise Program pays tuition for first-time students to attend one of the state’s public universities. The last few budgets added $16 million to $20 million on top of the ongoing $20 million already included.  

• Transportation: Transportation is another priority in recent budgets that failed to make the cut in both proposals, even despite legislators considering about $107 million worth of projects this session. Last year, Arizona invested $109 million in transportation projects.  

Revenue proposals 

The spending side of current budget proposals failed to meet or prioritize the bare minimum required to meet the needs of Arizonans. These budget proposals invested even less in Arizonans than during the recent deficit crisis in 2025. However, both budgets included creative and even harmful means of increasing the $378 million revenue available — only this time to primarily fund more costly tax cuts.  

H.R. 1 tax cuts 

• Last summer Congress passed H.R. 1, a law that financed massive tax breaks with cuts to essential health care and food assistance programs. When the federal government cuts taxes, states must decide whether they will adopt these changes. Given new and high cost shifts to states from H.R. 1, states are bracing for these budget pressures, so none has fully adopted all H.R. 1 tax cuts. Yet, both budget proposals in Arizona prioritized forgoing hundreds of millions in revenue to match H.R. 1 cuts. The Republican legislators proposed a full match for the first year — a minimum $441 million cost this FY 2026. Beginning in FY 2027, the proposal would have eliminated the senior, State and Local Tax (SALT), and auto loan interest deductions and replace them with a $25 increase to dependent credits, along with new deductions for child and dependent care expenses, retirement and pension income, and Roth IRA contributions — changes estimated to reduce state revenue by roughly $1 billion between FY 2027 and FY 2029. The governor’s proposal only matches a few H.R. 1 tax changes: standard, senior, tips and overtime deductions. Since all but the standard deduction are set to expire after tax year 2028, these temporary tax cuts would cost $692 million from FY2026 through 2028.   

Revenue raisers 

• Tax exemption and credit repeals: To free up more revenue to balance the budget, both proposals included repealing a few prior tax cuts. The governor’s budget removes the tax exemption for data-center equipment that would raise revenue at least $39 million every year. Republican legislators proposed repealing seven tax credits that would free up about $77 million in ongoing funds.  

• Fee increases: The governor’s budget also includes a fee increase for sports betting that her office estimates could bring in about $520 million over the next three years. This was not included in the Republicans’ proposal.  

Funding tricks and cuts 

• Fund Transfers: Similar to FY 2025, the Republicans’ proposal sought to sweep money from state funds to balance the budget. In 2025, policymakers transferred $776 million from almost 100 state funds. This year Republicans considered transferring $360 million one-time funds from 28 state funds, including:  
  • $27 million from rural transportation
  • $25 million from university technology and research initiatives
  • $14 million from the Housing Trust Fund
  • $7 million from utility regulation  

Much of the money that was proposed for transfer has already been spent or obligated to original intentions.  

• 5% Agency Cuts: Republicans also proposed 5% across-the-board cuts to 56 state agencies to gain ongoing funds of $99 million. Agencies are still dealing with $39 million cuts to balance the FY 2024 and 2025 budgets. If these 5% cuts had gone through, agencies like the Department of Economic Security (DES), would have lost $10 million on top of the $3 million cut in 2025. This amount is almost as much as DES needs for staff to implement H.R. 1 changes to SNAP.  

• Clawbacks: Republicans’ proposal planned to lapse funding for 11 items, including graduate medical education, a teacher-development pilot program, and transitional and reentry housing — taking back a one-time fund of $26 million.  

A history of tax cuts that limit budget options 

The two budget proposals only fully funded a few formula-based needs while cherry-picking a few one-time items from recent years that require ongoing funding. These limited and short-sighted plans are the result of insufficient revenue after over 30 years of tax cuts.  

Since the 1992 passage of Proposition 108, a policy that requires a two-thirds legislative approval for raising revenue; state policymakers have cut revenue almost every year. This policy has made it nearly impossible to repeal tax cuts when the state budget needs revenue, resulting in about $11 billion lost since it became law.  

About $7 billion of total revenue losses have come from changes to the individual income tax alone with the flat tax as the biggest culprit, draining about $3.3 billion in just three years.  

More tax cuts are NOT the best bang for our buck 

Despite decades of tax cuts, most Arizonans are struggling to afford basic necessities today more than ever. Tax cuts have failed to ease economic anxieties and limited our budget’s ability to truly invest in essential programs and services that support the economic well-being for individuals, families, and Arizona as a whole.  

With our limited revenue situation, every dollar spent and cut from our budget should be carefully considered. Tax cuts may sound good — like the deductions being considered for tips, overtime, child/dependent care, and retirement/pension. However, they are actually poorly targeted to benefit the wealthy few and unreachable for those who need the most support. But is a revenue cut that benefits a few worth more than ensuring our child care program is fully funded?? 

Given our current inability to adequately invest in schools, transportation, and other essential needs that benefit most, we need to rethink our view of taxes if we truly want to make life more affordable for all of us. Taxes are something we should all see as fulling our duty to ensure our state budget can invest in things that make Arizona a place to build thriving communities and better economic opportunities for all Arizonans.