Economist warns about Arizona’s current spending levels

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(The Center Square) - If Arizona keeps spending a lot of taxpayers' money, it will face financial problems, according to an economist.

On Saturday, Gov. Katie Hobbs signed Arizona’s new $18.29 billion budget for Fiscal Year 2027, which includes approximately $1.45 billion in tax relief for Arizonans over the next four years.

“I’m thrilled to sign the bipartisan Arizona First budget into law,” Hobbs said.

“Starting on July 1, Arizonans will have no taxes on tips and overtime, a higher standard deduction, a deduction for seniors, and next year, an expanded child tax credit,” the Democratic governor added.

However, Zach Milne, a senior economist and research analyst for Common Sense Institute Arizona, told The Center Square on Monday that “spending has really gone through the roof.”

The FY 2027 budget is 86% larger than it was in FY 2019, Milne said. He added that Arizona has increased its spending by about 8% on average over this period.

Milne noted Arizona policymakers are “finding themselves in a crunch.”

“They like to point to tax cuts and other things that have been implemented, but the reality is [policymakers] can’t increase spending 8% per year for almost a decade and expect to have a solvent financial situation for the state,” Milne said.

The economist said Arizona’s budget includes increased health care expenses for its state Medicaid program and Arizona Department of Economic Security.

Costs for these programs have “skyrocketed,” he said.

Milne noted Arizona’s FY 2015 budget spent $1.2 billion on its state Medicaid program, while FY 2027’s budget will allocate nearly $3 billion to it. This represents a 150% increase in spending for its Arizona Health Care Cost Containment System.

On top of this, Arizona’s spending on the Division of Developmental Disabilities program within the DES has increased from $400 million to $1.8 billion over the same period, representing a 350% increase.

Milne told The Center Square that this type of healthcare spending is “relatively unsustainable.”

As COVID-era federal policies have ended, spending growth in these programs has slowed, but it is not yet back to pre-pandemic levels, the economist said.

Furthermore, Milne said numerous one-time spending items included in Arizona’s budget have also contributed to the state’s spending increase.

With the new budget passed, Arizona is projected to have less than $41 million in cash reserves from its FY 2027 general budget, Milne said, which he described as being “pretty low.” He noted for FY 2028, Arizona is projected to have $24 million in cash reserves.

State revenues grew quickly during the COVID-era, and policymakers increased Arizona’s expenditures rather than keeping the cash reserves the state had built up, Milne explained. In 2022, Arizona had $202 million in cash reserves for its general fund, according to the Arizona Joint Legislative Budget Committee.

Regarding tax conformity, the economist said Arizona’s budget conformed to most provisions of the tax cuts included in H.R. 1, also known as the One Big Beautiful Bill, except for the State and Local Tax (SALT) deduction.

Glenn Farley, CSI’s director of policy and research, previously told The Center Square that the SALT deduction is the “subtraction of your federal income taxes for your state and local taxes paid in the prior year."

Arizona’s SALT deduction will remain $10,000 while the federal one is $40,000.

Chad Heinrich, the Arizona state director for the National Federation of Independent Business, told The Center Square on Monday that the tax conformity items included in the FY 2027 budget will make it easier for Arizona small businesses.

Arizona lawmakers “conformed key business expense provisions that will align Arizona’s income tax with the federal changes that were adopted,” Heinrich said.

These changes will make “tax filing season for Arizona small business owners much easier because the state rules for most of the business expensing provisions match those at the federal level,” he said.

Heinrich added that H.R. 1’s tax conformity transcends Arizona’s income tax code so “small business owners are going to be able to invest in their business with confidence.”

Arizona’s alignment with the federal tax code will enable small businesses to create more jobs and attract investment, he noted.