What are tax credits and how do they affect the state budget?
Tax credits cost the state budget $661 million in fiscal year 2018 and have been growing fast (excludes credits for taxes paid to other states, family income credit and increased excise taxes).
Tax credits compete with state agency budgets for the same pot of funding, but state lawmakers exercise virtually no accountability or control over tax credits once they are in state law. 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. The dollar value of tax credits claimed is growing at a much faster rate than state revenues, the state’s economy, or state spending on K-12 education. Today there are 24 credits available to individuals and 20 available to corporations.
Tax credits lack the basic accountability and control of state spending. Unlike agency budget that must be approved by the state 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 agency spending is capped at amounts set each year by the legislature, only 7 out of the 44 credits have any limit. State legislators do not know what the revenue impact of any tax credit will be in any particular year until after the credit has already been taken.
Sources: Joint Legislative Budget Committee Staff, Appropriations Report FY 1999; House and Senate Budget Bills As Approved, 5/27/2019; Department of Revenue, Arizona Income Tax Credits Report, April 2019; US Bureau of Economic Analysis Gross Domestic Product by State, Fourth Quarter 2018.