Arizona faces $400M deficit as tax cuts kick in, voucher demand grows

PHOENIX — Less than four months into the budget year, Arizona already is spending more money for vouchers for students to attend private and parochial schools at taxpayer expense than was set aside through next June.

New figures from legislative staffers show there are now about 68,000 students getting the vouchers, which start at $7,300 a year.

The state budget was built on the assumption the vouchers would cost $625 million. But the report shows the state already is obligated to provide $665 million to meet the demand so far.

Democratic Gov. Katie Hobbs said this is a result of the Republican-controlled Legislature not heeding her warning in January that the universal voucher law approved last year — allowing any of the 1.1 million children in public schools to get vouchers — was not sustainable and needed to be pared back. Lawmakers refused.

Now it will be up to GOP leaders to figure out how to balance the budget, Hobbs said Wednesday.

Senate President Warren Petersen said concerns about expenses are overblown.

He said while voucher expenses are up, the number of taxpayers contributing to scholarship tuition organizations to help kids go to private and parochial schools — and getting dollar-for-dollar credit against the state income tax owed — is down.

“So it’s still a wash as far as (state government) expenses go,’’ the Gilbert Republican told Capitol Media Services.

$400M deficit predicted

But tax collections are not meeting estimates. The legislative staff report predicts that, without any changes, the state will end this fiscal year $400 million in the red.

Petersen does not dispute the tax figures. But he said they have nothing to do with vouchers, saying it’s at least partly the fault of the Biden administration because higher interest rates have cut into sales of cars and the sales tax revenues they produce.

Asked about the fact that it’s the Federal Reserve Board that hiked borrowing rates in an effort to curb inflation, Petersen responded, “Biden appoints the Fed.”

“That is the most hilarious answer I’ve ever heard,’’ Hobbs countered, calling it “a deflection from the unsustainable growth we’re having in the (voucher) program that they refuse to try to rein in.’’

Income tax cuts cited

The legislative report says the biggest cause of the decline of tax dollars is not from sales taxes but from the cuts the Legislature approved in 2021 to state income tax rates — cuts structured to provide the largest percentage benefits to the most wealthy.

That point was underlined by Hans Olofsson, chief economist with the Joint Legislative Budget Committee that advises lawmakers on finances and budgets.

“You can see right away that individual income tax is the main culprit for the downward revision’’ in revenues, Olofsson said. “It’s actually now expected to collect roughly half a billion (dollars) less than what we assumed to be in the enacted budget.’’

Sales taxes are also now expected to come in roughly $240 million less than expected. Those lower revenues are only partly offset by higher corporate income tax collections and increases in other collections.

A big part of those “other’’ tax collections is from higher interest the state is earning on its cash, with the state having a bank balance of about $9 billion, Olofsson said.

What that adds up to, even without the wild card of school vouchers, is the big hole in the current year’s budget — and an even bigger hole in the upcoming fiscal year of another $450 million.

On top of that, lawmakers agreed this year to a one-time income-tax rebate totaling $259.8 million, a cut that Hobbs’ press aide acknowledged she approved “to get her budget passed.’’

Consumer confidence worries

The situation is even more complex, according to economist Alan Maguire.

Credit card debt is at the highest level in 20 years, noted Maguire, who was Arizona’s chief deputy treasurer and now runs a consulting firm.

He told the Legislature’s Finance Advisory Committee Wednesday that most people have spent all their saved federal COVID stimulus money and are now relying on credit cards. And consumer confidence is dropping.

“People are positive right now, but they think six months from now it’s going to get worse,’’ Maguire said.

“That’s the first time in history when we’re in an (economic) expansionary period where people think the future is worse than the present,’’ he said. “That’s a very bad sign, because consumer confidence is the single best forecaster for state revenue.’’

Maguire said state residents are being pressured by higher rents and interest rates, on top of higher costs for many goods because of high inflation in the past two years.

Even with lower inflation this year, those higher costs still sting, said Jim Rounds, another economist who spoke Wednesday.

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“Yes, the rate of inflation is a lot less than it was before,’’ he said. “But unless it’s negative you’re still paying more. So that puts pressure on the consumer.’’

Still, Rounds found it hard to explain the big drop in sales tax revenues.

Per-pupil dollar figures debated

With Arizona’s higher dependence on sales tax revenue now that income taxes have been slashed, that’s a big problem for state revenues that pay for K-12 schools, the state’s Medicaid program, prisons and universities.

Petersen and House Speaker Ben Toma, R-Peoria, aren’t the only Republicans brushing aside the governor’s concerns.

Republican Tom Horne, the state schools chief and a big supporter of vouchers — officially known as “empowerment scholarship accounts’’ — denied that they are busting the state budget.

He said Hobbs fails to take into account that public schools spend about $13,000 a year per student, far more than the cost of providing a voucher. That means overall spending on public schools actually is $72 million below budget, Horne said.

But that figure is misleading.

Legislative budget staffers estimate current state aid — per pupil funding plus money doled out for school construction and maintenance — is at $8,164. That also includes revenues from the sale and lease of state lands and interest on trust dollars.

The average voucher, according to legislative estimates, is close to $9,800 when including additional dollars for students with special needs.

But Horne is counting on other revenues, including money raised through local property taxes in school districts, for his calculations. Add those in and the average per-pupil cost hits $12,211.

Horne said that needs to be included as these are funds paid by Arizona taxpayers. But these are not costs that come from, or impact, the state budget.

What’s next?

All that leaves the question of what, if anything, lawmakers intend to do — regardless of voucher costs — to bring expenses into line with revenues. Hobbs is dumping it into the laps of lawmakers.

“I’m not going to call a special session for that,’’ she said. “These guys dug this hole. They’re going to have to figure out how to get us out of it.’’

Petersen said the answer is simple.

“Americans have the ability to adjust their budget,’’ he said. “Government can too.’’

But he provided no list of programs he would slash in the state’s $17.8 billion budget.

One thing the governor said may need to be addressed deals with not just the idea of universal vouchers and their cost to taxpayers, but where the money is going.

Hobbs called attention to an analysis done by ABC 15 of where parents are spending some of the voucher funds, above and beyond things like tuition and books.

It found about $57,000 in purchases from Universal Yums, described on the firm’s website as a subscription company that sends a new box of foods from around the world once a month. Other expenses included $400,000 on aeroponic indoor gardens, $2 million in musical expenses, including a $4,000 piano, $3,400 spent on a single transaction at a golf store, a $10,000 expense at a sewing machine company, more than 100 passes to the Arizona Snowbowl ski resorts and $1.2 million in martial arts instruction.

Horne said many of these probably date from before this year, when the Arizona Department of Education was under the control of Kathy Hoffman, his Democratic predecessor. He said his own staffers have been paying closer attention.

But he said some of what the report found is not necessarily inappropriate.

“Our rule is we fund those things that they would get in the public schools,’’ Horne said. “So some of those things may be part of phys ed.’’

Anyway, he said, the fact remains that parents using vouchers get a fixed amount — about $7,300 a year for students without some special needs. Horne said it’s not like they get something extra for those purchases.

Hobbs, for her part, rejected the idea that some of the expenses approved, such as for golf, are just reflections of what is offered in public schools and therefore should be allowed.

“The value that taxpayers are getting is not comparable at all when you compare the public school phys ed program versus private lessons for an individual,’’ she said.