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Republican leaders face first Arizona budget crunch in a decade

Posted 10/16/23

PHOENIX — Republican leaders in the Arizona Legislature are facing their first budget crunch in nearly a decade and minority Democrats are pointing the finger right at the GOP, saying the pain that will be felt by state residents is a self-inflicted wound.

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Republican leaders face first Arizona budget crunch in a decade


PHOENIX — Republican leaders in the Arizona Legislature are facing their first budget crunch in nearly a decade and minority Democrats are pointing the finger right at the GOP, saying the pain that will be felt by state residents is a self-inflicted wound.

But the dire concerns voiced by Democrats aren’t resonating with the GOP leader of the state House nor the Republican who heads the Senate appropriations committee.

They call the sudden shortfall a relatively small and manageable issue that they’ve already taken the first steps to address.

The big revenue deficit revealed at a meeting of the Legislature’s budget analysts last week has been triggered by a combination of the massive income tax cuts enacted two years ago by then-Gov. Doug Ducey and his GOP allies in the Legislature, higher-than-expected spending on a new universal school voucher program Ducey championed, and lower sales tax revenue as consumers pare back and shift their spending.

That all adds up to an $850 million gap between revenue and spending in the current and coming fiscal years.

The school voucher law that gives each parent state cash to send their children to private schools or home-school them is not among the potential cuts, GOP House Speaker Ben Toma told Capitol Media Services.

The program, formally called Empowerment Scholarship Accounts or ESAs, has swelled from about 12,000 students before the expansion was enacted in June 2022 to nearly 69,000 now. Although official numbers aren’t yet available, a large majority of those getting new vouchers already were students attending private schools, with their parents often picking up much of the tab. Many, however, already received some subsidy through a separate tax credit program that is expected to drop as students move to the voucher program.

Spending on vouchers was estimated to be $635 million this school year but is on track to hit $665 million — if the program does not add additional students this year, which is likely.

“I understand that the left, including the governor and Democrats in general, don’t like the ESA program and they’re trying to find every which way to attack it,” Toma said in an interview from Romania, where he’s on a trip to his native country with his wife to hold meetings and celebrate their 25th anniversary.

Toma noted overall K-12 school spending is still within the budget enacted earlier this year despite a $40 million overage in voucher costs. And he said Democrats should move on to look at other ways to cut, because ESA’s are here to stay.

“I can tell you that there is zero chance ESAs are going away, even though they seem to continuously want to make it about that,” he said of legislative Democrats and Gov. Katie Hobbs. “So we can continue to talk about something that’s not going to happen or focus on the things that are going to happen.”

Hobbs has called universal school vouchers a huge mistake that could hammer the state’s finances, but her efforts to scale it back after taking office in January failed amid solid Republican opposition. And Rep. Athena Salman, D-Tempe, said in a statement Republican lawmakers need to come “to their allegedly conservative fiscal senses and agree to put the brakes on their voucher program,” or risk devastating cuts to vital state programs like public K-12 schools, public safety and healthcare.

“We will already need to approve at least $40 million in supplemental funding in the next session to pay for their spiraling voucher costs,” Salman said. “If Republicans are going to cut revenue to the bone, the least they could do is not spend it so irresponsibly.”

Much of the shortfall can be blamed on a “flat tax” championed by Toma and enacted in 2021 that is now in full effect. It cut the top rate for high-earning taxpayers from 4.5% to less than 3%, and the vast majority of the cuts flow to wealthy Arizonans.

Individual income tax collections are down more than 27% since the fiscal year started on July 1.

The Legislature’s budget analysts now predict a $400 million shortfall in the current budget year and a $449 million deficit in the 2025 fiscal year which begins next July.

By contrast, this year’s budget had a whopping $2.5 billion surplus, all of which was allocated to one-time spending on various projects. Much of it for highway and other infrastructure projects that built up over Ducey’s eight years in office, while $260 million went to a tax rebate for parents with children. Those payments are for up to $750 per family and will be sent by mid-November.

All that means spending cuts are coming — and the Republican leader of the Senate Appropriations Committee said they have already started.

Sen. John Kavanagh, R-Fountain Hills, said a panel of lawmakers who approve spending on projects took the first step last week when they decided not to hear a Department of Administration request to spend $60 million budgeted to demolish two big state buildings near the Capitol in Phoenix.

He said other cuts will be made. And Kavanagh said in the context of the current $17.8 billion budget and next year’s projected $16.4 billion in spending, cutting $850 million will not be devastating for the state’s residents.

“There are plenty of things that we can put into the future.” Kavanagh said. “There are plenty of things that are nice to but not need to have that we can trim.”

Kavanagh is one of the few lawmakers of either party who were in the Legislature during the Great Recession, when state budget cuts totaled about 30% of overall spending. Those cuts devastated funding for K-12 schools and universities and led to cuts everywhere else in the state budget.

This isn’t that, Kavanagh said. And he noted the state has a $1.5 billion rainy day fund, which he and Toma said isn’t even being considered as a remedy for the current cash shortage.

“Within the Great Recession, we cut $3.5 billion from a $10 billion budget,” he said.

“This is nothing compared to that,” Kavanagh said. “So while I’m sure some people want to inflate the seriousness of this as part of a campaign against school vouchers, this is not a dire financial situation and people should not be overly alarmed.”

While reticent to point out specific areas to cut, Toma pointed to some of the highway spending packed into the current budget as possibilities. The Legislature allocated more than $500 million to those projects in the current year.

“There’s always an opportunity to look at that, especially when you have that much one-time spending on infrastructure projects,” Toma said. “More than likely there will be opportunities there to make up the difference.”

The Hobbs administration and lawmakers from both parties will hammer out what to cut from the spending plan when the Legislature returns to January. That will leave them just six months to patch the hole in the current budget and craft a plan for the next year that’s in line with revenue projections.

And unlike the federal budget, state budgets must be balanced every year.

Toma said even with the huge income tax cuts, state spending is still way up from several years ago, when revenue surges allowed lawmakers and Ducey to pour cash into schools and other areas that have been short of money for years.

“If somehow the narrative ends up being this is some sort of tragedy or something, I think that would be considerably overblown and missing the point,” Toma said. “We still have record revenues after the tax cut, if we continue to maintain it, we’re going to have record revenues in the future as well.”