Arizona revenue growth projections fall by more than half as Hobbs, lawmakers work on budget

Legislative budget analysts are significantly downgrading their projections for Arizona revenue in the next fiscal year.

That could leave lawmakers and Gov. Katie Hobbs with fewer options as they negotiate a budget.

Projected revenue growth fell by more than half to about $280 million, as the budget panel factored in a big drop in tax collections and other state revenue.

That would leave the state with a surplus that is less than 2% of the expected budget.

The drop comes as economists say there are increasing chances of at least a mild recession following the tariff announcements from the Trump administration.

Republican leaders at the Capitol have yet to release their spending plans for the coming budget. Hobbs announced she wants to spend surplus funds on housing, child care assistance and state trooper raises.

The Legislature's independent budget analysts and a panel of public and private economists who join with them to project state revenue agreed Thursday to factor in a big drop in tax collections and other state revenue for the coming budget year.

Staff with the non-partisan Joint Legislative Budget Committee and the economists who sit on the Legislature’s Finance Advisory Committee lowered the expected state revenue growth for next year from $612 million to $277 million. That leaves just a relatively tiny surplus -- less than 2% -- in the expected $17.6 billion budget for the coming year.

That means the Legislature and Gov. Katie Hobbs will have a lot fewer options as they negotiate a budget for the fiscal year that starts July 1.

And that's if a recession doesn't hit.

The chances of at least a mild recession have soared in recent weeks, according to experts at banks, investment houses and the Federal Reserve Bank of New York. For example, this month J.P. Morgan Research raised the probability of a recession hitting this year from 40% to 60%.

If one emerges, state spending on health care for the poor alone could go up enough to erase the state's $1.6 billion rainy day fund in just two years, according to a "stress test'' scenario presented to the panel on Thursday by the JLBC, as the legislative analysts are known.

The group's predicted dip in state revenue growth is based on what JLBC Director Richard Stavneak described as huge economic uncertainties caused by the federal government's move to sharply boost tariffs, which will raise prices for businesses and consumers, and cuts to federal spending that is spent in Arizona. Expected federal tax cuts often matched by Arizona could help stimulate the economy eventually but at least in the short-term cut revenue.

The combined action and the resulting unease about the economy's direction will likely cause businesses and consumers to trim spending, with lagging economic activity leading to a dip in state tax revenue, Stavneak warned.

"If you are a business or you're an individual, when there is economic uncertainty the tendency is to sort of pull back, not spend as much, not invest as much, until you get greater clarity on what is happening,'' Stavneak told the panel. "Which I think would be a wise position for state government to also have.''

That position led the panel to lower its expectation for the state’s revenue growth, which is in effect new cash to spend, in half.

Stavneak and the other panelists never named Trump, just pointing to federal actions.

The Republican-controlled Legislature and Democratic governor don't have to use the JLBC numbers. But they're generally viewed as the best guess for the upcoming budget year and are usually adopted.

The new figures come as the June 30 end of the current budget year looms and as Hobbs and GOP lawmakers are locked in a fight over how to fill a $120 million shortfall in a state program serving disabled Arizonans that will run out of money in just weeks.

Both had planned to spend most of the $600 million in new money for pet priorities – Hobbs on raises for state troopers and corrections officers, housing and new child care assistance. Republicans haven't released their spending plan, but have been pushing for tax cuts on top of huge income tax reductions enacted under former Gov. Doug Ducey.