What is the General Fund and what does it support?
The General Fund is the backbone of Arizona’s state government, supporting more than 60 state agencies. 87% of the fund goes to ten agencies, with the Department of Education receiving the largest portion.
Does the General Fund spending keep up with Arizona?
No. Arizona’s budget is $1 billion short in payment obligations and formulas than it should be.
The state legislature has used a variety of accounting gimmicks and suspended formulas to avoid adequately funding state programs and services.
- Delayed payments, an accounting gimmick known as “rollovers,” push the payment of certain bills into the following fiscal year. They can continue year after year until the legislature decides to reverse them.
- Several state budget formulas are unfunded. These formulas are put into state law to automatically adjust specific types of spending for certain factors every year, such as inflation or growth in people needing the service. The legislature has eliminated some of these formulas from state law, and others remain in state law but go without funding in the state budget.
Is there state funding beyond the General Fund?
Yes. There are four types of funds.
The largest source of funding for state agencies is the federal government. Arizona receives over $29 billion in federal dollars. The General Fund provides nearly $18 billion. Other funds include $5 billion appropriated by the legislature and $13 billion non-appropriated funds. Non-appropriated funds are funds that agencies may spend without being authorized by the legislature.
How much does Arizona rely on federal funds?
Arizona depends more on federal funds than most states. Federal funds make up 44 percent of Arizona’s revenues, above the national average of 32%. Only Montana, Wyoming, Louisiana, and Mississippi depend more on federal dollars than Arizona.
Who contributes to the General Fund through taxes?
Individual income and sales and use taxes make up 81 percent of General Fund revenue.
Arizona’s dependence on sales and use tax makes the state’s tax structure regressive – low-income people pay a higher portion of their income in taxes than people with higher incomes. Unlike the individual income tax, which is based on a percentage of income, the sales and use tax remain the same regardless of income.
Do higher-income Arizonans pay a greater share in taxes?
No. While all families in Arizona help pay for health, education and public safety through state and local taxes, low-income and middle-income families pay a larger portion of their income in taxes than do wealthier families after accounting for deductions and credits. When all types of state and local taxes are combined—income, sales, and property—families with income in the lowest 20 percent pay twice what families in the top 1 percent do—$13.10 for every $100 of income and $9.63 for middle-income families compared to $6.47 for the highest-income families. This upside-down tax system is regressive.
Do low-income and middle-income Arizonans pay out the greatest share in taxes?
Yes. While all families in Arizona help pay for health, education and public safety through state and local taxes, low-income and middle-income families pay a larger portion of their income in taxes while wealthier families pay a lower share of their income in taxes after accounting for deductions and credits. When all types of state and local taxes are combined—income, sales, and property—families with income in the lowest 20 percent pay more than twice what families in the top 1 percent do—$11.83 for every $100 of income compared to $5.02 for the highest-income families, while middle-income families pay $9.84. This upside-down tax system is regressive.
Do corporations pay their fair share?
No, many corporations end up paying little or no state income taxes.
Nearly three out of four corporations that filed income taxes in Arizona in 2020 (the most recent data available) had the minimum tax liability of $50. Just one in ten corporations paid $5,000 or more in income taxes. Arizona’s corporate income tax rate, which used to be nearly 7 percent, is now 4.9 percent. Exemptions and tax credits passed over the years also result in less tax revenue for Arizona.
What are tax credits and how do they affect the state budget?
A tax credit reduces the amount of taxes owed on a dollar-for-dollar basis – a $400 tax credit can wipe out a $400 tax bill. Arizona individual and corporate taxpayers reduced their 2019 tax bills by $841 million through the use of tax credits.
Tax credits compete with state agency budgets for the same taxpayer dollars. The dollar value of credits available to taxpayers grew by 156% between 2012 and 2019 – much faster than the state’s economy, general fund revenues, and spending on Arizona’s public schools.
Tax credits lack the basic accountability and control of state spending. Unlike agency budgets that must be approved by the legislature every year, tax credits are reviewed only once every five years. Even after a review that shows questionable results, active tax credits without sunset dates remain unless a bill to repeal them passes with a two-thirds vote in both the House and Senate. While state spending cannot exceed the amounts approved by the legislature each year, very few tax credits have any limit. In addition, state legislators do not know what the revenue impact of tax credits on state revenues will be until after the credits have been used to reduce taxes paid.
Legislation passed in 2017 and revised in 2021 requires the Department of Revenue to identify tax credits that have been unclaimed for three consecutive years and begin a process to repeal those credits in the annual technical tax correction legislation. Since then, five unused credits have been repealed.
What is “tax credit carryforward” and how does it affect the state budget?
Individuals and corporations can accumulate unused credits to use in the future, further threatening state revenues.
For most tax credits, if taxpayers do not owe enough income tax to use the whole credit, they are allowed to save the unused portion of the credit and apply it against future tax liability. For instance, if a taxpayer owes $300 in taxes and has contributed $400 to the charitable organizations tax credit, the $100 unused portion of the credit can be carried forward and used on next year’s tax return. The number of years a tax credit can be carried forward ranges from 5 years to 15 years.
Today, individuals and corporations are carrying forward a combined $2.0 billion balance in tax credits that can hit the state budget at any time. This carryforward amount is three times greater than the credits claimed in a single year. The carryforward balance for corporations is expected to grow because the amount of corporate taxes due will decrease with the phased down corporate tax rate.
Can the Arizona Legislation raise taxes or eliminate credits?
It’s very difficult, and rarely happened in nearly 30 years.
Arizona’s constitution requires a supermajority (two-thirds) vote of both chambers of the legislature to raise revenue through increased taxes or to reduce or eliminate active tax credits, tax exemptions, or deductions, even when those tax giveaways are ineffective. Since this supermajority requirement was approved by Arizona voters in 1992 via Proposition 108, the legislature has rarely met the threshold. In contrast, tax cuts—which only need a simple majority vote to pass—have been enacted every year but one since 1992, shrinking state revenues by more than $7 billion when adjusted for inflation.