Arizona budget deficit already at $400 million, growing quickly

Jim Small

(Arizona Mirror) The budget deficit that Arizona lawmakers will be grappling with when they return to work in January will be much larger than what was expected just a couple of months ago, state budget analysts say.

In mid-October, analysts from the Joint Legislative Budget Committee said the state budget that went into effect just three months earlier was already facing a shortfall. They predicted the budget would face a $400 million deficit when the fiscal year ended in June, driven by decreased revenues because of the new flat income tax and skyrocketing private school voucher spending, both of which were GOP priorities.

But things are even worse than expected. In their latest monthly report on the state’s fiscal health, issued last week, JLBC analysts say the budget is already $407 million in the hole after just five months. That means the estimated size of the deficit is sure to grow, they warned, when a new forecast is issued in late January.

The growing deficit is fundamentally a revenue problem, as tax collections are down, almost entirely due to a sharp decline in individual income taxes. In 2021, GOP lawmakers and then-Gov. Doug Ducey changed Arizona income taxes from a graduated tax rate to a flat tax, a move that budget analysts said would cost the state about $1 billion in revenue from 2021 levels when they were fully implemented.

That full implementation happened this year, and the result is the bottom falling out of income tax collections. The roughly $380 million in income taxes collected in November was more than 23% less than was collected a year ago. So far in the 2024 fiscal year, income taxes are down nearly 30% — more than $830 million.

Other categories, like sales taxes and corporate income taxes, are up year-over-year.

Arizona lawmakers return to the Capitol for the 2024 legislative session on Jan. 8.