BILL #    SB 1318

TITLE:     income tax rate; reduction; surplus

SPONSOR:    Mesnard

STATUS:   As Introduced

PREPARED BY:    Hans Olofsson

 

 

 

Description

 

The bill would require the Joint Legislative Budget Committee (JLBC) to compute an individual income tax reduction amount each fiscal year. FY 2027 would be the first year with a fiscal impact from the bill. The annual calculation would be based on the following three-part process:

 

1) Compare the state's projected ongoing General Fund revenues in the upcoming fiscal year to a "growth limit."  The growth limit would reflect the state's ongoing FY 2025 General Fund revenue collections, as adjusted for the annual change in inflation plus population growth from the prior calendar year.

2) If ongoing revenues exceed the growth limit, the JLBC would then calculate the "structural surplus" for the upcoming fiscal year. The structural surplus would reflect the difference between ongoing General Fund revenue and ongoing General Fund spending. 

3) JLBC would then multiply the structural surplus by 50% to compute the dollar value of the individual income tax reduction (labeled the "Arizona taxpayer return" in the bill). The Department of Revenue (DOR) would then be required to reduce the state's single 2.5% Individual Income Tax (IIT) rate to implement a tax reduction of that dollar value.  

 

See the analysis section below for a description of the bill's initial calculation schedule.

 

Estimated Impact

 

Based on the revenue and spending projections under the FY 2026 Baseline forecast published in January 2025, we estimate that SB 1318 would require the state's IIT rate to be reduced from 2.5% to 2.42% in Tax Year (TY) 2026.  This rate reduction was calculated based on 50% of the FY 2027 projected "structural surplus" of $349.5 million in the January Baseline forecast.  This means that lowering the IIT rate from 2.5% to 2.42% would reduce General Fund revenues by $(174.7) million in FY 2027 [= 50% of the FY 2027 structural surplus].

 

We have also published a Fiscal Note on SCR 1014, which outlines the same procedures.  With an effective date following voter approval at the 2026 General Election, SCR 1014 could have a fiscal impact as soon as FY 2029. SCR 1014 has a different impact than SB 1318 because of the different starting dates.

 

Analysis

 

The bill's initial calculation would occur for FY 2026 with the JLBC implementing the required 3-part calculation as follows: 

 

· JLBC would calculate the "growth limit" for FY 2026, which would equal FY 2025 ongoing revenue adjusted for the annual change in CY 2024 population growth and CY 2024 inflation.

· The FY 2026 "growth limit" would be compared to the FY 2026 ongoing revenue forecast under the January Baseline.

· If the FY 2026 ongoing revenue forecast exceeds the FY 2026 growth limit, JLBC Staff would calculate 50% of the FY 2027 structural surplus, which is then designated as the "Arizona taxpayer return."  DOR would then reduce the state's 2.5% single tax rate permanently starting in TY 2026 to reduce income taxes by the magnitude of the "Arizona taxpayer return," which would affect FY 2027 revenue collections. 

Based on the January Baseline forecast, the state is expected to have ongoing General Fund revenues of $16.0 billion in FY 2025, $16.66 billion in FY 2026, $17.37 billion in FY 2027, and $18.19 billion in FY 2028. These figures include the impact of previously enacted tax reductions and deductions for Urban Revenue Sharing (URS).  Ongoing General Fund expenditures are projected to be $15.57 billion in FY 2025, $16.53 billion in FY 2026, $17.02 billion in FY 2027, and $17.63 billion in      FY 2028.  Based on these projections, under the January Baseline, the structural surplus is estimated to be $427.2 million in FY 2025, $129.2 million in FY 2026, $349.5 million in FY 2027, and $558.1 million in FY 2028.

 

The bill establishes a "growth limit" that would reflect the state's ongoing FY 2025 General Fund revenue collections, as adjusted for the annual change in inflation plus population growth from the previous calendar year. The rate of inflation would be calculated using the Metro Phoenix Consumer Price Index (CPI), as determined by the U.S. Bureau of Labor Statistics (BLS). The rate of population growth would be calculated using total state population, as determined by the U.S. Census Bureau.

 

Arizona's population grew by 1.46% in Calendar Year (CY) 2024, according to the U.S. Census Bureau.  The BLS reported that the Metro Phoenix CPI increased by 2.22% in CY 2024.  This means that the sum of population growth and inflation was 3.68% in CY 2024.   

 

Under the January Baseline, ongoing revenues are projected to be $16.0 billion in FY 2025. After multiplying this amount by the CY 2024 growth factor of 3.68%, the estimated growth limit under the bill is expected to be $16.59 billion in FY 2026 [= FY 2025 ongoing revenue of $16.0 billion x 1.0368].  As shown in Table 1 below, this means that FY 2026 ongoing General Fund revenue is projected to exceed the FY 2026 "Growth Limit" amount by $75.2 million. 

 

Table 1

 

 

 

 

 

Calculation of "Growth Limit" under SB 1318

 

 

 

($ in Millions)

 

 

 

 

FY 2025

FY 2026

 

 

 

Baseline Ongoing Revenue

$15,997.4

$16,661.8

 

 

 

Population Growth (CY 2024)

–

1.46%

 

 

 

Inflation (CY 2024)

–

2.22%

 

 

 

Population Growth + Inflation (CY 2024)

–

3.68%

 

 

 

"Growth Limit" Amount

–

$16,586.6

 

 

 

Revenues Above/(Below) "Growth Limit"

–

$75.2

 

 

 

 

While the growth limit would be calculated first for FY 2026 (based on the ongoing revenue level in FY 2025 adjusted for population growth and inflation in CY 2024), the required IIT rate reduction would start first in TY 2026 based on 50% of the structural surplus in FY 2027.  As noted above, since the structural surplus is estimated to be $349.5 million in         FY 2027, the bill would require the TY 2026 IIT rate to be reduced such that the dollar value of that reduction would equal 50% of the structural surplus, or $(174.7) million.  Based on the revenue projections under the January Baseline, we estimate that a $(174.7) million IIT reduction would require DOR to lower the state's single tax rate from 2.5% to 2.42% in TY 2026.

 

Local Government Impact

 

Incorporated cities and towns receive 18% of individual and corporate income tax collections from 2 years prior from the Urban Revenue Sharing (URS) Fund established by A.R.S. § 43-206. Since the bill would decrease statewide IIT revenue by $(174.7) million in FY 2027, overall annual URS distributions would decrease by $(31.4) million in FY 2029.

 

2/19/25