Arizona projected to face $1.7 billion shortfall as revenues decline

CORRECTION: The original version of this article said Empowerment Scholarship Accounts would be $778 million over what was budgeted. The story has been corrected to reflect that ESAs are projected to be $78 million over allocation.

Arizona’s Joint Legislative Budget Committee is now projecting a $1.7 billion shortfall when combining projected deficits from fiscal year 2024 and 2025. The committee says declining revenues are the cause of Arizona’s shortfall.

The individual income tax is the “primary underperformer” when looking at fiscal year 2024’s general fund revenues. Collections of the individual income tax dropped 27.7% when compared to last year and are $481 million less than anticipated.

According to a JLBC January Baseline presentation, the most likely causes for drops in revenue are due to the implementation of Arizona’s flat income tax rate of 2.5% and lower pre-tax income, such as capital gains. However, “the enacted budget included $2.3 billion for the impact of the rate reduction.”

Both sales taxes and corporate income taxes are also not meeting their projections. Sales tax has grown 4.2%, but is $35 million below forecast and corporate income tax is negative with 8.1% less than the prior year and $9 million below forecast, according to the JLBC.

The budget committee is also assuming that $703 million will be awarded to Empowerment Scholarship Accounts–better known as universal school vouchers–by the end of fiscal year 2024, $78 million over what was budgeted. But the committee believes a drop in public school enrollment will offset the voucher shortfall.

“Public school enrollment is projected to decline by 1% in FY24 compared to FY23, which will offset the ESA shortfall,” the presentation read.

The committee finalized their January report saying that projected shortfalls for FY24 and FY25 will likely change as more actual data comes in.