Arizona Gov. Katie Hobbs unveiled her plan for a smaller Fiscal Year 2025 budget Friday, the same day the state's Joint Legislative Budget Committee (JLBC) released its findings that Arizona's budget shortfall has doubled to $1.7 billion.
Hobbs' plan covers about one billion dollars in spending cuts, only about 60% of the projected deficit.
Here are five key points you need to know from Hobbs' proposed FY25 budget:
- Budget shrink: Hobbs is asking for $16.25 billion for the new fiscal year, which begins in July. That's a smaller budget than the last fiscal year, which ended up at about $17.8 billion.
- Revenue recovery: With a budget shortfall this year, Hobbs is making a handful of efforts to try to recover revenue. These include making a one-time, 1% cut to both the executive and legislative budgets. Hobbs is also proposing transferring 78 different funds across 44 boards and agencies, which her office says will generate additional revenue of $282 million for the state's General Fund. $418.6 million is expected to be recovered in revenue from "transportation projects appropriated by the Legislature."
- In-migration: Hobbs is using FY25's budget to try to bring more people to the Grand Canyon State. Her proposal includes a handful of new investments including launching a mortgage assistance program, homebuyer help for rural areas, and expanding the low-income housing tax credit program for home builders.
- Addressing Arizona's healthcare worker shortage: In an effort to expand healthcare workforce education, and to more broadly address the state's shortage of healthcare professionals, Hobbs is proposing $46 million in one-time funding earmarked for state universities to expand their healthcare workforce education programs. Hobbs previewed the plan, part of her "AZ Healthy Tomorrow" initiative, during her State of the State on Monday.
- ESA: In what could be her most contentious proposal this budget year, Hobbs is putting a big asterisk on anyone looking to get an Empowerment Scholarship Account, better known as ESA or school vouchers. Under Hobbs' plan, students would not be eligible for the program if they have not attended public school for at least 100 days. Hobbs' reform proposal for ESA would go further, repealing prior-year eligibility for Universal ESA beginning in the upcoming fiscal year. Hobbs also proposed repealing income tax credits for school tuition organizations, better known as STO, which fund scholarships for students to attend qualified Arizona private schools.
A PROJECTED $1.7 BILLION BUDGET SHORTFALL
Analysts at the Joint Legislative Budget Committee, whose job is to monitor Arizona’s revenues and expenditures released new figures effectively doubling the state’s budget shortfall from $850 million to $1.7 billion. The report released quarterly estimates an $835 million shortfall for the budget enacted this past session and a $879 million shortfall for the next fiscal year.
Six months into fiscal year 2024, JLBC analysts say the switch to a 2.5% flat income tax rate has caused a 27.7% drop in state revenues. A drop in revenues from the flat tax was expected and built into this past budget but analysts now say the decline is $481 million more than anticipated. The report also says, that although corporate tax collections began the year strong, revenues are now down 8% compared to last fiscal year. Sales taxes, typically a stable revenue stream, are down 42% and $35 million below the JLBC forecast.
By June, analysts project the lower income tax rates will bring in $875 million less to state coffers. Nearly $200 less in sales taxes and $56 million less corporate tax dollars. Not all revenue is down, however, as $219 million made up from other revenue sources like gambling taxes and the state lottery will offset some of the decline in taxes.
While the JLBC does point to the flat tax as a primary driver of the projected shortfall. They note the numbers will be revised again later in the year once tax collection season begins. They also noted Empowerment Scholarship Accounts, which was set aside $625 million in the FY24 budget, has not caused any additional impact on the shortfall at this time.
REPUBLICAN RESPONSE
Republicans, however, are the other half of the equation when it comes to negotiating a final budget by the June 30 deadline. GOP leadership indicated in a statement Friday afternoon that they were unhappy with some of Hobbs' key proposals, specifically surrounding education policies like ESA and STO.
"Dead on arrival" is the phrase Senate Appropriations Chair John Kavanagh used when it came to Hobbs' plan.
"Her grandstanding of bipartisanship during her State of the State Address is a far cry from the reality of this budget proposal, as her funding cuts strictly target Republican priorities," the Fountain Hills Republican said.
