Why The Arizona Legislature Has Not Passed A Budget Yet

By Howard Fischer, Capitol Media Services
Published: Monday, April 29, 2019 - 1:08pm

Arizona Capitol building
Lauren Loftus/KJZZ
Arizona Capitol in Phoenix.

The official calendar says the Arizona Legislature should have gone home on April 23. But lawmakers are starting another day of session Monday, with the key hang-up being how to spend the $11.4 billion budgeted for the new fiscal year that begins July 1.

It's not as simple as dividing up the revenues. That's because Gov. Doug Ducey and GOP lawmakers cannot agree about how much money is flowing into the treasury.

It's starts with the governor's proposal for the state keep a $150 million windfall from changes in federal tax law. That's additional money being taken out of the pockets of some Arizona taxpayers due to the 2017 change to federal tax policy.

Then there's the effort by some legislators to repeal a new $32-a-vehicle registration fee to pay for Highway Patrol. Last session, lawmakers approved this new fee with the understanding that it would be no more than $18 a year. The unexpected raise has lead to some lawmakers to propose repealing the fee, but Ducey has not supported that plan because he said the $200 million it would generate is needed.

Thirdly, there's the fact that the economy is booming. Some estimates say the state will take in close to $1 billion more than it currently takes to keep state agencies running at current levels.

Members of the legislature and the governor have tough calls to make on how much to spend, whether to make up for prior cuts, how much to use to pay down the state debt, and how much to set aside for a “rainy day.”

Tax Conformity

The 2017 Tax Cut and Jobs Act approved by President Donald Trump and the U.S. Congress cut federal tax rates and also increased the standard deduction available to individuals who choose not to itemize.

But the fallout for Arizona is that federal law also eliminated or reduced the ability of individuals who do itemize to take certain deductions, especially for state and local taxes and some mortgage expenses. And Arizona traditionally "conforms'' its deductions to federal law.

The change in federal law means Arizonans, unable to take those deductions, will pay an extra $190 million, though that is offset by a $40 million cut in business taxes.

Ducey vetoed legislation to reduce Arizona income taxes elsewhere to offset the higher taxes introduced in 2017. And the governor has so far refused to budge from his position that Arizona will conform -- meaning the state will get the extra money.

That's unacceptable to many Republicans who call the move a hidden tax increase.

Lawmakers can't divide up the revenues until they know if the state will receive that additional $150 million.

Rainy Day Fund

Ducey's priority at this point is to add money to the state's "rainy-day fund.''

By law, deposits are supposed to be made into that account based on increases in real personal income in Arizona. The fund is capped at 7 percent of the budget, which would be about $700 million.

Lawmakers drained the fund in the years after the Great Recession and have not made the required deposits. The account now sits at less than $500 million.

Ducey wants to boost that to $1 billion as an insurance policy because Arizona has a long history of boom and bust.

Debt

Some lawmakers note that the state borrowed $1 billion during the Great Recession, essentially selling off some state buildings and buying them back between now and 2030 in a lease-purchase plan. That $1 billion debt is now below $800 million.

Using the cash in hand to pay off that debt not only reduces the state's liabilities but also would translate to interest savings down the road.

here's another advantage to this approach: It doesn't commit the state to future expenses.

Education Funding

Some lawmakers would like to instead restore pre-Recession funding to things like higher education and social programs.

During the recession and in the years after, the state eliminated the special "district additional assistance'' account: money given to schools for expenses ranging from books and computers to buses. That cut aid to schools by about $371 million a year.

In the wake of a lawsuit, Ducey and lawmakers last year committed to restoring those dollars -- eventually.

Last year lawmakers put back $100 million, and Ducey's pledged another $68 million this coming fiscal year. But that still leaves funding at less than half of what the schools are supposed to get.

Those are multi-year commitments in what many see as an uncertain a fiscal environment.

Hence the push to use the cash for one-time expenses.

Other One-Time Expenses

Pinal County farmers want $20 million to help with the cost of constructing new wells and canals to replace the Colorado River water that they are losing as a result of the drought contingency plan.

There is a possibility that other road and bridge projects will emerge from the final budget deal.

Ticking Clock

The next self-imposed deadline to adjourn is May 13.

That's when state law automatically cuts the per diem allowance that lawmakers get, aside from their $24,000-a-year salary, by two thirds.

In June, Rep. Travis Grantham, R-Gilbert, deploys with the Air National Guard. That leaves Republicans with just 30 in the 60-member chamber. And it takes 31 to approve anything, meaning the GOP would have to get at least one Democrat to go along.

And finally the new fiscal year — the one that the budget is supposed to fund — starts July 1. And, unlike the U.S. Congress, there are no provisions for a "continuing resolution'' to keep government open.

But Ducey has suggested he's prepared to outwait lawmakers, noting his office works through the summer.

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