Less money flowing in: Arizona budget forecast shifts from tiny surplus to deficit

Arizona's state budget is likely to end the year in the red, prompting early predictions of cuts to state programs and further fueling an already heated debate over the cost of the state's universal school voucher program.

State budget analysts on Wednesday projected a $400 million deficit, a reversal from the slim $10 million surplus that was projected five months ago.

Reasons cited for the financial reversal: plummeting collections from the state's new 2.5% flat tax, which cut individual income rates for all taxpayers, as well as lagging sales-tax revenue, a sign of cautious consumer behavior.

Since the July 1 start of the budget year, individual income tax collections are 27.4% below projections, the Joint Legislative Budget Committee reported. That's $243 million lower than anticipated.

Overall, state revenue collections have dropped 6.2% below what had been forecast. Where the budget originally forecast a 1.9% revenue gain in the current budget year, the projection now is a 0.6% decline.

Earlier projections encouraged lawmakers to spend down the $2.5 billion surplus they had at the start of the budget year. The surplus was sliced up into individual allotments to each lawmaker, as well as pooled into a program that will issue tax rebates to families starting next month.

Cuts likely to state agencies, services

State Rep. David Livingston, chairman of the House Appropriations Committee, said the projected shortfall of $400 million for the next budget year could mean 5% to 10% cuts to state agencies and services. He dismissed the prospect of reducing programs in the middle of this budget year, which ends June 30.

"The projections were too rosy," Livingston, R-Peoria, said of the estimates that were the building blocks of the current budget.

Livingston said some of those allocations could be pulled back.

“I think that’s the big debate – what do we reduce and what do we claw back?” he said.

School voucher blame game ramps up

Gov. Katie Hobbs on Wednesday again warned that the state's Empowerment Scholarship Account program, which provides taxpayer funding for private schooling to all Arizona children, will bankrupt the state.

“The school voucher program is unaccountable and unsustainable," she said in a news release. "It does not save taxpayers money, and it does not provide a better education for Arizona students."

Her comments came as the state Department of Education reported ESA enrollment of 68,455 students as of Tuesday. The program has exceeded its projected enrollment for the entire budget year three months into the cycle, Hobbs said, and a new semester starts in January — suggesting there is no end in sight to the program's cost.

The state can't afford to foot the increasing costs, Hobbs, a Democrat said, adding the program imperils other state services, from law enforcement to veterans services to child safety. Reining in the program is her priority for the coming legislative session, she told reporters Wednesday.

Her comments drew quick and unified pushback from the GOP leaders of the Legislature, as well as the Republican schools superintendent.

They noted the ESA enrollment is very close to projection, and the Education Department is on track to end the budget year with a $77 million surplus.

"Governor Hobbs continues to blast the ESA program as unsustainable and exceeding estimates. Neither are true," said House Speaker Ben Toma, R-Glendale. He sponsored the bill that ushered in universal vouchers in 2022.

Legislative budget figures show the program's enrollment thus far is 75 students higher than forecast for the full school year, and the program cost is running $40 million higher than anticipated. But the department has surplus funds that can cover that extra cost.

In his statement, Toma challenged the governor to propose "serious policies, not tweet vague threats."

In recent months, Hobbs has suggested capping enrollment in the voucher program, or possibly setting an income cutoff for the families of participating students.

Reporting from KNXV-TV (Channel 15) earlier this month detailed ESA accounts that paid for pianos, ski passes and luxury-car driving lessons, although the bulk of the program's expenditures have paid for school tuitions.

Reach the reporter at maryjo.pitzl@arizonarepublic.com or at 602-228-7566 and follow her on Threads as well as on X, the platform formerly known as Twitter @maryjpitzl.

Arizona Republic Reporter Stacey Barchenger contributed to this article.

This article originally appeared on Arizona Republic: Arizona's budget could be underwater by $400M by June, analysts say