Last month, legislative analysts said the state’s budget deficit had shrunk by $400 million because tax collections had been better than expected for a few months, leading to a revision in the forecast for the last few months of the year.
But that trend seems to have reversed, as the state took in $93 million less than that new forecast in April, thanks largely to disappointing sales tax collections that continue to trend downward — an ominous sign, given that more than half of the state’s annual funding comes from sales taxes.
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Sales taxes have grown slowly since the fiscal year began in July 2023, but that tepid growth has significantly weakened in 2024. In April, sales tax collections were 0.1% less than they were in April 2023, only the second month of outright decline since the COVID-19 shutdowns in Spring 2020.
“While the Sales Tax category has seen slower growth since January, the negative growth for the month was surprising,” analysts for the Joint Legislative Budget Committee wrote in their monthly report on state revenues and spending.
That decline was driven by sagging retail activity, and the 0.9% year-over-year growth in that subcategory represented “the weakest performance since November of last year.” But hiding in that number, the analysts noted, is something troubling: Brick-and-mortar retail sales in Arizona, which make up 90% of retail tax collections, actually declined by 0.8% compared to a year ago.
That means Arizonans pulled back on spending at local businesses. Some of that money was spent instead with online and remote retailers, which make up the other 10% of retail tax collections and kept the subcategory from being negative, but much of it likely stayed in people’s pockets or was needed to pay for essentials, like housing, food and fuel.
Sales tax collections for contracting activities were up by 5.3% over last year and have been the lone bright spot in the category, but analysts noted that they have “slowed notably” over the last three months.
JLBC analysts peg the state budget at $1.3 billion in the red — $650 million in the current fiscal year, which ends in June, and $676 million for the upcoming fiscal year.
In January, JLBC Director Richard Stavneak explained that the “primary culprit” behind the shortfall is a precipitous drop in individual income tax collections — largely due to the full implementation of the state’s flat tax in 2023. 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 fiscal year, and the result is the bottom falling out of income tax collections.
Additionally, spending on a universal private school voucher program was much higher than initially expected.
Republican legislators and Gov. Katies Hobbs have made little progress on the state budget, despite both publicly committing more than a month ago to negotiating a spending plan in earnest, and it remains unclear when a budget will be presented to lawmakers.
The two sides entered negotiations at odds over how large the deficit is, much less how to tackle the shortfall. Hobbs in January estimated the problem was only about half the size that JLBC projected. She had proposed addressing the deficit largely through a combination of clawing back money that has been appropriated for one-time ventures — many of them road and highway projects inserted into the budget by Republicans — drastically reforming the state’s private school vouchers to remove about 50,000 students from the program and eliminating a private school scholarship tax credit.
Those ideas have already been declared dead on arrival by Republican lawmakers.
The baseline budget that GOP legislators use to start crafting a spending plan scraps $2.3 billion of the $2.9 billion in one-time spending in the current year’s budget, much of which was for highway projects that don’t require multiple years of funding. But with increased formula spending on education and health care, the baseline spending is $1.5 billion less than the current year.