Arizona's fiscal 2027 budget includes tax cuts tied to federal act

Arizona ended its legislative session this month with the passage of a fiscal 2027 budget after a contentious fight over conformity with federal tax law changes, while a renewed push to constrain a costly education voucher program was squashed.

The nearly $18.3 billion spending plan for the fiscal year that begins July 1, which Democratic Gov. Katie Hobbs signed on June 13, includes tax cuts totaling $1.4 billion over four years that were part of her agreement with Republicans who control the legislature.

"Arizona is now the only state in the nation fully adopting President Trump's tax package, and that means workers, families, seniors, and veterans get to keep more of their hard-earned money," Republican Senate President Warren Petersen said in a statement.

After a battle over tax conformity with the president's One Big Beautiful Bill Act kicked off the legislative session in January, squabbles continued with Hobbs announcing a moratorium on bill signing in April, and in May vetoing a Republican budget she called "unbalanced and reckless." A deal surfaced on June 9.

"This bipartisan compromise shows what we can do when we put common sense before political games and focus on delivering real results for our communities," Hobbs said in a statement.

An analysis of the budget by the Joint Legislative Budget Committee showed a $1.367 billion fiscal 2026 beginning general fund balance falling to $772.6 million in fiscal 2027 and to just $41.2 million in fiscal 2028.

S&P Global Ratings flagged potential financial pressure from federal tax and policy changes when it revised its outlook for Arizona's AA issuer rating back to stable in September after 14 months at positive.

Arizona, which does not issue general obligation debt, has an Aa1 issuer rating and stable outlook from Moody's Ratings.

Efforts to rein in the state's costly universal private and home school voucher program, which was created under a 2022 law, once again failed to gain traction in the Republican-controlled legislature.

In her Jan. 12 State of the State address, Hobbs renewed a call for greater accountability.

"While other government entitlements have strict requirements and oversight, the program continues to operate unchecked, squandering taxpayer dollars with no accountability," she said in her speech. "It seems like every day, we learn about new shopping sprees happening at the expense of taxpayers?diamond jewelry, high-end clothing and furniture?who knows what taxpayers will be footing the bill for tomorrow?"

The program had 100,713 students with Empowerment Scholarship Accounts mostly totaling between $7,000 and $9,000 per pupil in the current school year, with 6,405 more enrolled for the upcoming school year as of June 15, according to the Arizona Department of Education. ESA awards cost the state $1.115 billion on an annualized basis, according to the program's third quarter of fiscal 2026 report.

As the price tag blew past "highly speculative" 2022 legislative projections, S&P raised concerns last year that escalating costs could crowd out Arizona's other discretionary spending and introduce uncertainty into its education funding framework.

In an April report, Moody's said the marginal state budgetary impact of additional ESA participation is expected to moderate.

"Early participation appears to have matured, and incremental cost growth attributable to universal eligibility beyond inflation is likely to be driven by changes in the school-aged population and additional switching from district and charter schools," the report said. "If Arizona's school-aged population peaks and begins to decline, demographic-driven cost growth would likely be limited."

A petition drive aimed at stopping fraud in the program and protecting students has until July 2 to submit 255,949 valid signatures to appear on the Nov. 3 statewide ballot. The proposed Protect Education Accountability Now Act would also prohibit ESAs for families with annual incomes over $150,000 and redirect unused voucher funds to public schools.

A ballot measure placed on the ballot by the legislature would require school districts with more than 7,500 students to spend at least 60% of their budget on direct instructional expenses or face funding penalties.

A bill signed by Hobbs this month authorizes bond-issuing state affordability infrastructure districts aimed at making new homes affordable and speeding up construction with an alternative way to pay for roads, water, sewer, and other services.

Bill sponsor Republican State Rep. Jeff Weninger said it provides "a pro-growth, pro-taxpayer housing solution."

"Infrastructure is one of the biggest costs baked into the price of a new home," he said in a statement. "HB 2999 gives builders, landowners, and communities an innovative tool to pay for that infrastructure over time, get more homes built, and avoid putting taxpayers on the hook."

Under the law, property owners have until June 30, 2036, to petition the Arizona Finance Authority to establish a district, which would be managed by a board of property owners. The board would have the ability to issue revenue and general obligation bonds and levy taxes and assessments subject to certain requirements.

Among water-related bills passed was Senate Bill 1560, which raises the per application loan cap for the Arizona Water Infrastructure Finance Authority's water supply development revolving fund to $20 million from $3 million.

A bill enacted into law for the Pinal County Water Augmentation Authority modifies revenue bond provisions and allows it to enter into a loan repayment agreement with WIFA to construct, acquire, or improve projects, including wastewater treatment and drinking water facilities.

WIFA's long-term water augmentation fund, which the legislature created in 2022 with the intention of appropriating $1 billion over three years to help fund new water sources, once again received no state money. The fund's year-end balance is expected to total about $380 million, according to a spokesman.

The legislature appropriated $6 million for a Colorado River litigation fund as a potential court battle looms over post-2026 operating guidelines for reservoirs amid an impasse between Upper and Lower Basin states. Arizona, California and Nevada are the Lower Basin states.

Lawmakers sent the governor a bill that would direct the state auditor general, along with an independent transportation research entity, to review the feasibility of expanding light rail in Maricopa County and if the continuation, modification, or discontinuation of state appropriations and bond issuance for light rail is warranted.

Legislation that raised concerns about revenue bonds stalled. It would have imposed a four-year moratorium on city and county utility or transaction tax rate hikes or higher fees.