Arizona’s budget basics

According to the National Association of State Budget Officers (NASBO), Arizona’s total expenditures in fiscal year (FY) 2019 were $38.0 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2019 were $2.1 trillion, ranging from $4.5 billion in South Dakota to $311.3 billion in California.

Each state allocates spending and taxes differently among different levels of governments, and local governments often administer programs with state funds, so combined state and local government data show a more complete picture of individual benefits and contributions when comparing states.

Per the US Census Bureau, Arizona’s combined state and local direct general expenditures were $48.2 billion in FY 2017 (the most recent year census data were available), or $6,838 per capita. (Census data exclude “business-like” activities such as utilities and transfers between state and local governments.) National per capita direct general expenditures were $9,446.

Arizona’s largest spending areas per capita were public welfare ($2,058) and elementary and secondary education ($1,170). The Census Bureau includes most Medicaid spending in public welfare but also allocates some of it to public hospitals. Per capita spending is useful for state comparisons but is an incomplete metric because it doesn’t provide any information about a state’s demographics, policy decisions, administrative procedures, or residents’ choices.

Arizona’s combined state and local general revenues were $52.6 billion in FY 2017, or $7,467 per capita. National per capita general revenues were $9,592. Arizona uses all major state and local taxes. After federal transfers, Arizona’s largest sources of per capita revenue were general sales taxes ($1,466) and property taxes ($1,099).

Arizona’s politics

Governor Doug Ducey, a Republican, was elected in 2018 with 56 percent of the vote. The next gubernatorial election is in 2022.

Republicans control both the House of Representatives (31 Republicans to 29 Democrats) and Senate (17 Republicans to 13 Democrats). Control of the governor’s mansion and each house of the legislature gives Republicans a trifecta in Arizona. The entire legislature is up for election in 2020 because both representatives and senators serve two-year terms.

Arizona’s budget institutions, rules, and constraints

Arizona uses an annual budget. The legislature must pass a balanced budget, but it can carry a deficit into the following year. Arizona limits spending growth based on personal income growth with a binding rule that requires a legislative supermajority or a vote of the people to override it. A supermajority is similarly required for any legislation that increases taxes or revenues. Arizona also places limits on the total authorized debt the state can incur but not on debt service.

(Note: Some states have informal budget institutions that constrain overall spending growth or a specific expenditure’s growth.)

Arizona’s recent fiscal debates

• In spring 2018, Arizona teachers walked out of their classrooms and protested state cuts to education spending. The governor and legislature responded by increasing education spending (including a 20 percent increase in teacher pay) by hundreds of millions of dollars in the FY 2019 budget and planned additional increases for future budget years. However, some education advocates remain concerned that no new revenue source was provided for the increased spending and that the state’s per pupil education funding remains below its pre–Great Recession level. As such, advocates introduced a 2018 ballot measure that, if it had passed, would have increased individual income tax rates on high earners to pay for more education spending and raised nearly $700 million annually for education spending. However, the Arizona Supreme Court blocked the ballot initiative, citing misleading wording. Governor Ducey’s FY 2020 budget continued with the scheduled spending increases, but education funding remains a contentious policy and political issue in Arizona.
  
• All states with an income tax link to the federal tax code to some degree. As such, the Tax Cuts and Jobs Act also affected state taxes across the country. Arizona’s code was mostly unaffected, but it had one distinct conformity issue: The state’s Department of Revenue sent out tax year 2018 forms that conformed with the federal changes before the legislature passed a law requiring the state to adopt (or reject) the federal changes. Both the Republican governor and the Republican-controlled legislature wanted to fold the federal tax changes into Arizona’s code. However, the governor wanted to send the resulting tax revenue increase to the state’s rainy-day fund, while most Republican legislators wanted to use it for a state tax cut. This disagreement left taxpayers possibly filing incorrect state tax forms and receiving incorrect tax refunds or bills. However, the two sides eventually agreed on a bill (HB 2757) that conformed to the federal tax changes as the forms anticipated, so filers did not need to send amended returns to the state. The legislation sent the resulting revenue from tax year 2018 to the rainy-day fund but also cut state taxes in tax year 2019 by lowering rates and increasing the state’s standard deductions to the federal levels. The state estimates the legislation will increase revenue by $155 million in FY 2019, reduce revenue by $52 million in FY 2020, and reduce revenue by $24 million each year after.
• All states are struggling to modernize their general sales tax as consumers increasingly purchase services instead of tangible goods. The general sales tax was originally designed for goods (because most state sales taxes were designed in the 1930s), and making new transactions taxable is often technically complicated and politically challenging. However, after Arizona voters overwhelmingly approved Proposition 126 in 2018, the task is now impossible in Arizona. The ballot measure constitutionally prohibits the state from adding new services to its sales tax base or increasing rates on currently taxable services. As consumers continue to purchase more untaxed services, this could force the state to raise the sales tax rate on goods or increase other taxes to maintain tax revenue.

Arizona’s current budget

Governor Doug Ducey’s FY 2020 budget proposed spending increases for K–12 education, including a pay increase for the state’s teachers (the second year of a three-year plan) as well as additional state money for a teacher-training program. Governor Ducey also focused much of his budget and 2019 state of the state address on increasing Arizona’s rainy-day fund to over $1 billion.

The legislature passed its budget in May 2019 and mostly focused on increasing spending on education and sending money to the Budget Stabilization Fund (not everyone agreed, however, that the budget raised education spending sufficiently).

Governor Ducey released his proposed FY 2021 budget and gave his 2020 state of the state address in January 2020.

For more on Arizona’s budget, see

• the Arizona General Accounting Office,
• the Arizona Financial Transparency Portal,
  
• the Arizona Joint Legislative Budget Committee, and
  
• the Arizona State Legislature research briefs.

Arizona’s economic trends

Arizona’s per capita income (per the Bureau of Economic Analysis) was $46,233 in 2019, ranking 42nd among the states. It was below both the national average of $56,663 and the Southwest regional average of $50,578. The state’s median household income (five-year estimate) was $56,213 in 2018, ranking 30th among the states and below the national average of $60,293. Arizona’s poverty rate was 16.1 percent in 2018 (five-year estimate), above the national rate of 14.1 percent.

Although Arizona’s averages tell a story about the entire state, Arizona is composed of diverse localities. For example, the city of Nogales’s median household income was $28,238, and its poverty rate was 33.9 percent; the city of Queen Creek’s median household income was $98,214, and its poverty rate was 6.3 percent.

Arizona’s unemployment rate historically tracks the national average, but in recent years it has been among the highest in the country. (See how COVID-19 is affecting state employment and earnings data.)

The major industries that contributed the most to Arizona’s gross domestic product (GDP) in 2019 were finance, government, professional services, social services (i.e. health and education), and manufacturing. Finance, government, and social services contributed more to Arizona’s GDP than they did to the nation’s and region’s GDP, while professional services and manufacturing were less important to Arizona than they were to the nation and region in 2019.

Looking at more specific industries, among those that accounted for at least one percent of Arizona’s GDP in 2018, real estate produced more for the state than for the nation, contributing 14.2 percent to Arizona’s GDP and 12.1 percent to the nation’s. Other industries that overperformed in Arizona relative to national averages in 2018 were retail, administrative and support services, transportation equipment manufacturing, and mining.