PHOENIX – Arizona’s wobbly budget picture just got a lot bleaker as the impact of recent moves by the Trump Administration throws a monkey wrench into the state and national economies.
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.
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And that’s if a recession doesn’t hit.
Recession worries rise
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.‘’
Lower expectations for revenue growth
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.
UA budget forecast ditched
The panel that met Thursday usually uses four "sectors’’ to come up with an overall prediction of the state’s revenue – the JLBC’s staff, the FAC panelists’ combined opinion, and "base’’ and "cautious’’ forecasts by economists at the University of Arizona.
This week, they decided to ditch the UA forecasts and rely just on the predictions of the FAC panel and legislative budget staff. That’s because the UofA model uses quarterly data, which has been made inaccurate because of Trump’s moves.
The University of Arizona’s George Hammond, who runs the university’s Economic and Business Research Center, agreed that his group’s predictions on revenue, which were generally in line with January’s, are out of date because of recent federal actions.
"If it were updated, the UA forecast would be significantly lower than we have operated under,‘’ Hammond said.
He noted that the state’s job growth slowed significantly last year despite slowing inflation, a sign that a dip was already primed.
"Risks to economic growth are significantly elevated,‘’ Hammond said in his presentation to the FAC. Like Stavneak, he ticked off tariffs and federal spending cuts as causes, but added one more: mass deportations.
"Mass deportations, we’ll see how that plays out,‘’ he said.
"But our labor market is pretty tight with an unemployment rate of 4%,‘’ he said. "You start deporting large shares of our labor force (and) that will be a significant problem for labor supply – we’ll experience shortages and other issues.‘’
Hammond also noted that job growth in Arizona had flattened out, something backed up by Doug Walls with the state Department of Economic Opportunity, which measures employment in the state.
Walls said the state has been seeing job losses and lower hiring since last year, with the unemployment rate going from 3.3% in March 2024 to 4.1% last month.
"A lot of the economic indicators out there are pointing toward slower growth, and backing up what we’re seeing in the job market,‘’ Walls said.
Recession talk ‘overblown’
Talk of recession is overblown, said Alan Maguire, an FAC panelist who runs his own economic and policy consulting firm and is a former investment banker and chief deputy state Treasurer.
While Maguire noted that housing and stocks are overpriced and he sees slower growth, "that is not a recession.‘’
And he pointed to AI chip company Nvidia, which just put in an order for $500 billion in new chips, many to be made at Taiwan Semiconductor’s new plant in Phoenix.
"So we have a built-in driver and those are AI chips which are really hot,‘’ Maguire said. "I frankly don’t listen to the panicking.‘’
That said, Maguire said there’s a lot more downside risk to the economy, and "uncertainty is very high.‘’
"There is definitely a lot going on and it’s a time to be cautious,‘’ he said.
Randie Stein with the investment banking firm Stifel, Nicolaus & Company, Inc., said she agrees that there’s little hope for increased state revenue.
"Nothing is telling me that we’re going to have substantial gains in the general fund over the next 15 months,‘’ Stein said. "It’s much more likely that we will be, hopefully, stable. But I think the possibility of actual declines is also possible.‘’
That’s in large part due to worry from business and individual consumers, said Daniel Court, chief economist with Elliott D Pollack and Co.
"When there’s uncertainty, consumers pull back,‘’ he said.
"How does a business make an investment in the current environment when you don’t know if a policy will stay in place or get worse or get better?‘’ Court said. "I think right now it’s maximum uncertainty.
Budget picture to stay ‘choppy’
He said "stress testing’’ to see potential impacts on the state budget is smart, but "it could all go away with a couple of tweets’’ from Trump.
Stavneak said there’s already signs that revenue is cratering.
State tax collections were running $60 million above what was expected in the FAC report issued in early January. But he said collections last month were way down, erasing $45 million of that gain and leaving the state just $15 million above forecast.
The coming months are likely to be choppy, with potential big gains in sales tax revenue as people and businesses stock up before the effect of new tariff’s boost prices. Corporate and personal income taxes could also go up as 2024 returns are processed.
Neither will give a real picture of the state’s economy – that will take months.
All that will play into budget talks between the GOP-controlled the Legislature and Gov Katie Hobbs.
In an interview before the FAC meeting, Sen. John Kavanagh, R-Fountain Hills, said he expected a downward revision from the FAC. The chair of the Senate’s appropriations committee said "a lot of the bets are off’’ if that happens.
"Not just because of their announced reduction,‘’ Kavanagh said. "But because it could show a trend that would be very troubling and make us much more conservative fiscally than we otherwise would be.‘’
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