Arizona Legislature’s budget analysts predict 2018 shortfall

The Arizona Legislature’s budget analysts on Thursday predicted a budget shortfall that could top $100 million in the current and coming year as the impact of corporate tax cuts continues to overwhelm increases in sales, insurance premium and personal income tax collections.

Chief budget analyst Richard Stavneak told economists and state officials who make up the Legislature’s Finance Advisory Committee that the shortfall will hit $104 million. That’s out of an expected $10 billion in spending for the budget year that begins next July 1. A panel of state lawmakers also attended the meeting.

Excluded from that projection is $90 million in current spending that is labeled one-time but appears to be an ongoing commitment by the Legislature and Gov. Doug Ducey, Stavneak said. That puts the expected shortfall next year close to $200 million if that spending isn’t cut. The revenue picture could also brighten, but signals are mixed, he said.

Phased-in corporate tax cuts enacted under former Gov. Jan Brewer in 2011 have cut more than $600 million in yearly revenue since 2014. Rep. Don Shooter, R-Yuma, said it may be time to revisit the corporate tax cuts and predicted a budget battle next year.

“It’s going to be a free-for-all. We’re back to the cutting, I don’t see any other way,” Shooter said. “It’s going to come down to who’s going to bleed the least, what’s going to be the least painful, I guess.”

Of the corporate tax cuts, Shooter said: “Maybe we should postpone them for a year or two until we get out of the woods.”

That’s unlikely to be a solution that will pass muster, though, because the 2017 tax year completes the four-year phase-in of the tax cuts. On top of that, Ducey spokesman Daniel Scarpinato all but ruled out any change.

“The governor does not believe in raising taxes and I think he’s made that very clear,” Scarpinato said Thursday, noting that Ducey’s priority is ensuring a competitive tax environment so companies expand in the state.

Scarpinato downplayed the analysis presented by Stavneak and his staff at the Joint Legislative Budget Committee, saying a small change in revenue or Medicaid caseloads could make a big difference in the bottom line. But he noted that the governor’s office has been warning for weeks of a tight budget year ahead and pledged that Ducey will present a balanced budget in January that will use any available cash to first boost education spending.

“K-12 education is going to continue to be at the top of the list,” he said.

Overall, state revenues for the 2017 budget year that ended June 30 came in $19 million below forecast, with sales and individual income tax ahead of projections and corporate income tax collections $52 million below forecast. This budget year’s overall revenue projections were revised downward, and corporate income tax collections are predicted to be the lowest since 1993.

Stavneak noted that another key part of state revenue also faces challenges, this time from Washington. The state collects more than $500 million a year in insurance premium taxes, more than 60 percent of it from health insurance providers. If the Trump Administration pushes through major changes in health insurance requirements, that revenue could drop significantly.