State of the State 2019: Tax Conformity Brings $200 Million to Improve Schools and Stabilize Budget

January 14, 2019

Governor Doug Ducey is wise to be supporting federal tax conformity. Arizona’s budget revenue situation has improved in recent years, resulting in a surplus of about $1 billion—largely seen as one-time dollars going into this session. On a per capita, inflation-adjusted basis, the state still has significantly less on-going revenue than it had at a similar point in the last business cycle in FY2007 (the late peak of the business cycle), approximately $3 for every $4 it had then. Consequently, though there was an infusion of funding for FY2019, largely due to #RedforEd and Governor Ducey’s 20 by 2020 plan, the state still lags considerably behind where it stood before the Great Recession.
Figure 1

Conformity with federal tax changes under the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, would enable the state to increase state revenues by approximately $200 million annually, about a 2 percent increase. Such a change would have a modest impact on state taxes paid by wealthy individuals whose after tax incomes rose by nearly 4 percent due to their substantially-reduced federal tax liability.
These added funds, if used wisely, would improve the fiscal management of the state. They would create a cushion to weather an upcoming recession and to shore-up needed state investments that have not been possible due to limited state government revenues.