Tag: revenues

Looking to Arizona's Next State Budget

On January 13, 2025, a new Arizona legislature will be sworn in and begin forming the 2026 state budget. Today’s budget outlook is significantly different from what legislators faced last January. Then, the state faced an $835 million deficit for the budget year that was already halfway over, with an additional $879 million deficit for the 2025 budget year. The Finance Advisory Committee recommended legislators identify $2.2 billion in solutions to re-balance the budget. In contrast, reports are already surfacing that today the state has a budget surplus for Fiscal Year 2026: the beginning balance was $324 million above what was originally expected, and, through the end of October, revenues are $235 million above what was anticipated in the budget.

Does this mean that the legislature has more than half a billion dollars to spend? Not exactly. There are key realities that advocates and legislators need to keep in mind when looking at budget priorities.

Current budget projections exclude spending that will eventually be added back in. State law requires the legislature to not only adopt a balanced budget for the upcoming year but to also estimate revenues and expenditures for the two years that follow. Arizona’s legislature has traditionally treated some spending that should be funded every year as one time – these “ongoing one-time issues” are funded in the budget being adopted but are not included in out-year projections. The largest of these funds that are vital on an ongoing basis are the K-12 building renewal grants and the state employee health insurance trust fund, totaling more than $323 million. Had just these two issues been treated as ongoing in the forecast, the three-year budget would not have been balanced.

Some of the steps taken to balance last year’s budget will be reversed at a cost to the General Fund in the future. Most of these reversals will not occur in the 2026 budget, but they will impact future spending. These include:

$37 million for the K-12 poverty weight and $29 million for K-12 additional assistance, both of which were recategorized as one-time in the current budget but with the intent that they be returned to ongoing in budget year 2028. These funds invest in additional supports and resources so all students can thrive and be successful in school and their future.
$200 million to reverse the temporary use of other funds in the Department of Juvenile Corrections, the Department of Corrections, and AHCCCS.
$2.9 million to replace the temporarily increased deposits into the General Fund from the regulatory boards. Many Arizona regulatory boards, such as the medical board and board of psychology examiners, deposit 10 percent of their revenues into the state’s General Fund and retain the remaining 90 percent for their operations. The legislature changed the distribution to the General Fund to 15 percent through budget year 2028, bringing an additional $2.9 million a year into the General Fund.

Some priorities that were unfunded or underfunded should be revisited. These include:

Child care assistance for families who can’t afford to work without affordable care. While the current budget included $12 million in increased funding, it was not enough to avoid the creation of a waiting list for low-income families in August 2024. Child care assistance not only helps families pay for quality child care but also helps employers by reducing the absences parents might have when other options fail. In the 2024 legislative session, $100 million in funding was sought to avoid placing families on a waiting list.
Financial support for informal kinship families. When children cannot live with their own parent(s), a grandparent or other relative is often the next best place for them. Children who are taken into Department of Child Safety custody and are placed with relatives through the court system are eligible for assistance of $204 a month for the first child and $71 for each additional child. Informal kinship families where the grandparent or other relative took the child in without the Department of Child Safety being involved also used to receive assistance – called “child only” payments – however, that part of the program was eliminated during the Great Recession and never restored. In these times of rising costs, restoration of this support for grandparents and kin is more important than ever.
Teachers Academy to grow new teachers. The teachers academy has provided more than 1,000 teachers a year since 2021. This program provides free tuition for students who agree to teach in an Arizona public school. For budget year 2025, funding was cut from $30 million to $16 million.
Promise Scholarships to make college affordable for eligible students with financial need. This program provides financial aid to Arizona high school graduates who meet the eligibility requirements for Pell Grants, making in-state higher education accessible for students who might not otherwise be able to afford it. The funding was cut from $40 million to $20 million. In addition, although the budget bills established a community college promise fund, no monies were appropriated for that fund.
Community college pathways for learning and job skill development. The budget continues to suspend the operating budget funding formula for Maricopa and Pima community colleges, and it suspends inflationary adjustments for STEM and workforce programs for all community colleges.

What caused last year’s budget problems? While the solutions to resolve last year’s budget problems were primarily spending cuts, the problem was caused by revenues that fell short of projections. This was not due to a softening of the state’s economy. Instead, while Arizona’s economy was strong, revenues failed to reach needed levels due to the final phase-in of the flat income tax, which reduced state revenues by more than $2 billion.

Bottom Line. While on the surface, Arizona’s budget picture appears much rosier than it did a year ago, there are critical ongoing expenditures masked as “one-time” investments as well as reversals of temporary shifts that must be taken into account for a true understanding of Arizona’s fiscal standing. Legislators and advocates need to remember that the steps taken to balance the budget, whether by changes in terminology or actual cuts, will have impacts several years into the future.

Tax Day Tip: It’s Time to Face Reality That State Revenues are in Disarray

Governor Hobbs and the state legislature have until June 30 to pass a budget. The major problem they face is state revenues that are lower than expected when they passed the budget last year. They need to not only adopt a new budget for next year but also balance the current one.

On Thursday, April 11, Arizona’s Finance Advisory Committee confirmed that state revenues are still below what is needed to support current state programs. Altogether, revenues are $1.8 billion below expected expenditures through budget year 2027. This is a new dollar amount but not a new trend. In January, when the committee last met, they delivered sobering information – the state revenue shortfall projections were more than double what they had been only three months before. Each of the next three budget years and the current one was expected to have less revenue than needed to support state programs.

The latest projections are an improvement over those from January. Still, the legislature is facing a $650 million shortfall for the budget year that ends June 30, with another $676 million short for the budget year that begins July 1. Altogether, the legislature and governor need to resolve $1.8 billion in shortfalls over the next three years.

What is the Finance Advisory Committee?
While the Finance Advisory Committee (FAC) meets at the state legislature, it is not a legislative committee. Instead, it is a committee created to advise the Joint Legislative Budget Committee staff on state revenues and the economy. Projections received from committee members, as well as projections produced by a model from the University of Arizona, are combined to produce the forecasts released at the meetings, which occur three times a year. During the meetings, committee members also provide information on Arizona’s economy based on their various areas of expertise, such as employment, wages, inflation, and housing.

It’s Not the Economy – It’s the Flat Tax

Unlike other times when economic conditions resulted in lower state revenues, Arizona’s economy continues to be healthy. The rate of job growth exceeds the national average. Per capital income is up 3.5% from 2019.

The revenue shortfall is almost entirely due to the flat individual income tax. In 2021, the Arizona legislature replaced Arizona’s graduated income tax with a flat tax. At the time, analysts estimated the flat tax would reduce General Fund revenues by $2 billion per year when fully phased in. The latest estimates are that individual income tax revenue for the current budget year alone will be more than $700 million less than projected when the budget was passed last year.

Arizona’s Legislature Needs to Fix the Revenue Problem, Not Cut Spending

Arizona’s budget situation is a revenue problem, not a spending problem, and the fix lies in restoring sound tax policy, not wholesale spending cuts. In fact, Arizonans are depending on the legislature and Governor to make investments in programs that help improve the lives of Arizona’s children and families, including:

Maintaining access to quality and affordable child care. Without an infusion of state dollars, working families seeking child care assistance will face a waiting list for the first time since 2019 and child care providers may have to close their doors;
Fully funding high-quality K-12 public education for Arizona’s children;
Supporting investments in affordable housing;
Expanding dental health services for adults on Medicaid, especially during pregnancy;
Increasing eligibility for KidsCare so more Arizona children can access health insurance;
Increasing access to services and financial support for kinship families who take over when parents can no longer care for their children, and
Strengthening anti-hunger and safety net programs to improve the well-being of families.

Short-Term Solutions Should Include Clawing Back Last Year’s Giveaways

Last year the legislature approved more than $2 billion in one-time funding for more than 75 special projects. Rather than adopting the stance that the budget should be balanced by one-size-fits-all cuts to existing, ongoing programs, the legislature should make the common-sense decision to postpone some of these new projects until revenues are available. Governor Hobbs’ budget proposal already identified many costly projects that could be postponed. The Governor’s budget also identified $282 million in agency funds that could be deposited into the General Fund while assuring that these funds remain structurally balanced.

A Long-Term Solution

It is clear that the flat income tax is much more costly than expected at the time it was passed. It’s time for the legislature to face this reality and adjust the tax rates so that priorities important to Arizonans can be funded. Revenue solutions should include returning to a graduated income tax. A graduated income tax would offset the regressivity of Arizona’s overall tax system that currently expects lowest income households to pay a much higher percentage of their income in taxes than households with higher incomes.

No More Tax Cuts

Arizona’s legislature has a history of passing tax cuts no matter what the fiscal situation looks like. Every year since 1990, with the exceptions of 2003 and 2020, the legislature has passed some type of tax cut. This includes $516 million in the middle of the Great Recession when the legislature was forced to mortgage the state capitol in order to pay bills. Those tax cuts included reducing the corporate income tax rate, reducing the capital gains tax rate, and allowing multi-state corporations to pick the method of determining their taxable income that is most advantageous to them.

On top of all prior tax cuts, the flat tax was the tax cut that finally depleted state revenues. The flat tax has also made Arizona’s tax code among the country’s most regressive. Today, low- and middle-income Arizona taxpayers pay up to twice as much of their income in state and local taxes than do those taxpayers with the highest incomes.

This Tax Day, the AZ Center urges the legislature to recognize that even today’s booming job and economic growth is not enough to withstand the harmful consequences of the flat tax. It’s past time for sound and economically just tax policies to be implemented.