(The Center Square) – Arizona is on track for a $400 million deficit in June at the end of fiscal year 2024, according to the Joint Legislative Budget Committee.
However, the shortfall is not expected to last long, as the committee estimates that things will turn “positive” by fiscal year 2027. They anticipate there will be a $450 million then will get smaller in fiscal year 2026.
The committee noticed that tax revenue of various types took a dip in the first quarter of fiscal year 2024, with income tax collections dropping by 27.4%, or $243 million, and sales tax slowing down to 1.6% growth, resulting to a $64 million “loss relative to the budget.”
In terms of causes, the JBLC says the “smaller capital gains” and a lower withholding rate could have “accelerated” the loss in revenue. As for sales tax revenue slowing down, they attributed it to retail sales. Still, corporate income tax continues to hold firm with 11.4% growth, adding $84 million.
The JBLC cautions that their estimates could “change considerably” throughout the fiscal year, especially with tax season in the spring having the potential to change the outlook.
The current budget that Hobbs signed contained district-specific incentive spending to entice lawmakers into voting for the package of bills. The expenditures, in addition to increased spending on public schools and homelessness initiatives, led to a total appropriation that eclipsed general fund spending in recent years.
State Democrats argued months ago that the Empowerment Scholarship Account program would have a significant impact on a budget shortfall. The JBLC estimates that it is $40 million over what the budget assumed, which was $625 million, which so far is under the Hobbs administration’s $320 million estimate from July, but the number still has time to climb higher.
Aside from ESAs, Democratic lawmakers are saying the shortfall should be blamed on the tax cuts signed into law by former Republican Gov. Doug Ducey.
“Never forget—Republicans created this mess,” Rep. Analise Ortiz, D-Phoenix, posted. “It’s a pattern for them: Cut taxes for the wealthy. Spend tax dollars recklessly. Blame others as we spiral toward bankruptcy. We need to flip the Legislature to correct the injustices Republicans have inflicted on the working class.”
Others said that the budget signed by Hobbs is a major factor in the projected shortfall, as well as the overall national economy.
“This is a spending problem and a general revenue problem, not a tax cut problem,” Common Sense Institute of Arizona’s Director of Policy and Research Glenn Farley said in an email. “Spending is way up – $8 billion since FY17, and more than $2 billion spending increase in just the last year. For context, the income tax cuts re just $1.5 billion over three years.”
“Now, with a one-time cash shortfall and a general slowdown in revenues (not just in income tax, but other taxes like sales tax that were not cut), there’s a rush to blame only the income tax and the flat tax,” Farley, who was Ducey’s chief economist, added. “This is ironic when the flat tax was phased in over three years and gated behind revenue triggers, while the large spending increase this year was done all at once and lump sum. Had it been phased in over time and/or subject to triggers, there may not have been a shortfall at all.”
