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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. More than 90% of the fund goes to eight agencies, with the Department of Education receiving the largest portion.

 

Source: Joint Legislative Budget Committee Staff, Appropriations Report FY 2020

Does the General Fund spending keep up with Arizona?

No. Arizona’s budget is $1.3 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 enough funds are available 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.

 

Source: Joint Legislative Budget Committee staff, FY 2020 Appropriations Report (June 2019)

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 nearly $18 billion in federal dollars. The General Fund provides nearly $12 billion. Other funds include $4 billion appropriated by the legislature and $10 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 43 percent of Arizona’s revenues, above the national average of 32%. Only Montana, Wyoming, Louisiana, and Mississippi depend more on federal dollars than Arizona.

 

Source: Joint Legislative Budget Committee Staff, FY 2020 Appropriations Report

Who contributes to the General Fund through taxes?

Individual income and sales and use taxes make up 87 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.   The corporate income tax used to provide 10 percent of General Fund revenue, but tax cuts and tax credits enacted over time have reduced the corporate income tax’s share to 4 percent.

 

Source: Joint Legislative Budget Committee staff, Appropriations Report 2020

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—$129.54 for every $1000 of income and $94.06 for middle-income families compared to $59.09 for the highest-income families. This upside-down tax system is regressive.

 

Source: Institute on Taxation & Economic Policy, Who Pay’s, 2018

Do corporations pay their fair share?

No, many corporations end up paying little or no state income taxes.

Three out of four corporations that filed income taxes in Arizona in 2017 (the most recent data available) had the minimum tax liability of $50. Fewer than 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.

 

Source: Arizona Department of Revenue, Annual Report for Fiscal Year 2019, Corporate Tax by Size of Tax Liability, Tax Year 2016.

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.

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 $1.8 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.

 

Source: Department of Revenue, Arizona Income Tax Credits, November 2018

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 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 $5 billion when adjusted for inflation.

 

Source: Tabulations prepared by Tom Rex, Associate Director, Center for Competitiveness and Prosperity Research, Arizona State University, based on data from the Joint Legislative Budget Committee Staff, Appropriations Report, various years and the U.S. Department of Commerce, Bureau of Economic Analysis.

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