PHOENIX — Democratic Gov. Katie Hobbs and the Republican-controlled Arizona Legislature return to the state Capitol on Monday with a nearly $1 billion problem on their hands.
Less than six months after they celebrated passing a bipartisan budget, lawmakers face a steep deficit due mostly to plummeting revenues from a massive tax cut that took full effect last year and skyrocketing costs from a school voucher program expansion.
A year ago, the state had a budget surplus of $1.8 billion. Now, it has a shortfall of about $400 million for the current fiscal year and another $450 million shortfall in the following year. Budget analysts say the shortfall will likely grow when the state's next revenue forecast is released later this month.
The tax cut approved by legislators in 2021 and signed into law by Hobbs' Republican predecessor, Gov. Doug Ducey, had eliminated the state's graduated income tax and replaced it with a flat tax, which was phased in and took full effect during 2023.
From July through November, Arizona saw a decrease of over $830 million in revenues from income taxes, marking a nearly 30 percent decline.
The voucher program lets parents use public money for private-school tuition and other education costs. It started in 2011 as a small program for disabled children but was expanded repeatedly over the next decade until it became available to all students in 2022.
Originally estimated to cost $64 million for the current fiscal year, budget analysts now say it could top $900 million.
Stan Barnes, a political consultant in Phoenix and a former Republican state lawmaker, said it's hard to say how legislators and Hobbs will confront the growing costs, but he predicted they'll be forced to compromise.
"It's going to be one of the most difficult exercises in recent memory, given the Grand Canyon-sized space between the Republican legislature and the Democratic governor," Barnes said. Sen. John Kavanagh, chair of the Senate Appropriations Committee, disputed a budget crisis, saying Arizona could balance its books by postponing building projects, having state agencies return unspent state money and other measures.
"In an $18 billion budget, it's easily manageable," Kavanagh said. Rep. Oscar De Los Santos, a Democrat who serves as assistant minority leader in the Arizona House, blames Republican policies for the budget problems. The tax cut likely won't be repealed, he said, but he believes the voucher program can be limited.
"This is a self-created, self-inflicted wound that the Republicans have caused," he said. "Now we don't have the resources we need to tackle the important issues in our state."
The income tax cut championed by Ducey had eliminated the state's previous graduated tax scale, which started at 2.59% and had a maximum of 4.5% for income over $159,000 a year for a single person. All taxpayers now pay a maximum of 2.5%.
Democrats have criticized the cut as a windfall for the wealthy, while offering fewer benefits for most taxpayers. Supporters have trumpeted the overall effects of the cut on the state's economy and said citizens want to see lower taxes.
The changes in Arizona's voucher program led to a sharp increase in the number of participants. Before the expansion, nearly 12,000 students — including disabled children, those living on Native American reservations and children in low-performing schools — took part in the program.
Now that all students can apply for the vouchers, nearly 73,000 students participate. The average scholarship is roughly $9,700 per student.
Critics say the expansion is a drain on the state's coffers, while backers say the expansion lets parents choose the best school for their children.
About 75% of the students who got vouchers immediately after the program was expanded had no prior record of attending an Arizona public school, according to Department of Education data reported in 2022. That suggests the state subsidies went largely to students whose families already were paying private school tuition.
Water issues will also be key for the Legislature amid a severe long-term drought in the arid southwestern state. Concerns are growing in Arizona about shortages from the Colorado River system, which provides the state with about 40% of its water, and about shrinking supplies of groundwater and regulation in rural areas.
Hobbs has cast drought as the "challenge of our time." Her administration has limited housing development in parts of metro Phoenix over concerns about water canceled state land leases that for years gave a Saudi-owned farm nearly unfettered access to pump groundwater.
On the voucher program, Hobbs vowed to bring accountability when she began her term a year ago as the first Democratic governor since 2009. Despite her criticism, the budget proposals negotiated by Hobbs last year didn't include any caps on the expansion, leading Democratic lawmakers to express dissatisfaction with the lack of action.
She's now proposing changes like requiring private schools that receive voucher funding have minimum education requirements for teachers and that students attend public school for 100 days before becoming eligible for the vouchers. She reiterated a desire for accountability and transparency in the program.
"Arizonans deserve to know their money is being spent on educating students, not on handouts to unaccountable schools and unvetted vendors for luxury spending," like ski resort passes and pianos, she said.
Kavanagh said controls to the Empowerment Scholarships Account voucher program — such as Hobbs' idea to require fingerprinting for teachers at private schools that receive tax dollars — make sense. But he believes the program will remain on the books.
"We are not getting rid of ESAs," Kavanagh said.
