BILL #    SCR 1014

TITLE:     surplus; income tax rate; reduction

SPONSOR:    Mesnard

STATUS:   As Introduced

PREPARED BY:    Hans Olofsson

 

 

 

Description

 

If approved by voters at the 2026 General Election, the resolution would require the Joint Legislative Budget Committee (JLBC) to compute an individual income tax reduction amount each fiscal year.  FY 2029 would be the first year with a fiscal impact from the resolution.  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 2027 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 resolution's initial calculation schedule.

 

Estimated Impact

 

The resolution would generate tax reductions if ongoing General Fund revenue grows faster than inflation and population. Under the FY 2026 Baseline Forecast published in January 2025, we project the growth limit to be exceeded in FY 2028. As a result, we estimate the resolution would reduce FY 2029 General Fund revenues by $(291.6) million, which is 50% of the projected FY 2029 structural surplus. Based on forecasted income tax collections, a reduction of that dollar magnitude would require DOR to reduce the state's single IIT rate from 2.5% to 2.39% in TY 2028.

 

Since the required tax rate reduction is based on projected revenue and spending levels several years from now, we consider our current estimate to be highly speculative.  

 

We have also published a Fiscal Note on SB 1318, which outlines the same procedures.  With a general effective date,     SB 1318 could have a fiscal impact as soon as FY 2027. SB 1318 has a different impact than SCR 1014 because of the different starting dates.

 

Analysis

 

The resolution's initial calculation would occur for FY 2028 with the JLBC implementing the required 3-part calculation as follows: 

 

· JLBC would calculate the "growth limit" for FY 2028, which would equal FY 2027 ongoing revenue adjusted for the annual change in CY 2026 population growth and CY 2026 inflation.

· The FY 2028 "growth limit" would be compared to the FY 2028 ongoing revenue forecast under the January Baseline.

· If the FY 2028 ongoing revenue forecast exceeds the FY 2028 growth limit, JLBC Staff would calculate 50% of the FY 2029 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 2028 to reduce income taxes by the magnitude of the "Arizona taxpayer return," which would affect FY 2029 revenue collections. 

 

Based on the January Baseline forecast, the state is expected to have ongoing General Fund revenues of $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).  Since the January Baseline revenue and spending projections do not extend into FY 2029, this analysis assumes that FY 2029 ongoing revenues and ongoing spending will increase by a standard annual growth rate of 4.5%. Under this assumption, ongoing revenues and ongoing spending are projected to be $19.0 billion and $18.42 billion, respectively, in FY 2029.  Based on these revenue and spending projections, the structural surplus would be $349.5 million in FY 2027, $558.1 million in FY 2028, and $583.2 million in FY 2029.

 

The resolution establishes a "growth limit" that would reflect the state's ongoing FY 2027 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.

 

Based on population projections from the Arizona Office of Economic Opportunity (OEO), we estimate that Arizona's population will grow by 1.47% in CY 2026.  (The U.S. Census Bureau does not provide state population projections.)  S&P Global, a large economic forecasting firm, projects that the rate of inflation will be 3.13% in CY 2026.  This means that the sum of population growth and inflation is projected to 4.60% in CY 2026.   

 

Under the January Baseline, ongoing revenues are projected to be $17.37 billion in FY 2027. After multiplying this amount by the CY 2026 growth factor of 4.60%, the estimated growth limit under the bill is expected to be $18.17 billion in FY 2028 [= FY 2027 ongoing revenue of $17.37 billion x 1.046].  As shown in Table 1 below, this means that FY 2028 ongoing General Fund revenue is projected to exceed the FY 2028 "Growth Limit" amount by $15.1 million. 

 

Table 1

 

 

 

 

 

Calculation of "Growth Limit" under SCR 1014

 

 

 

($ in Millions)

 

 

 

 

FY 2027

FY 2028

 

 

 

Baseline Ongoing Revenue

$17,370.4

$18,185.1

 

 

 

Population Growth (CY 2026)

–

1.47%

 

 

 

Inflation (CY 2026)

–

3.13%

 

 

 

Population Growth + Inflation (CY 2026)

–

4.60%

 

 

 

"Growth Limit" Amount

–

$18,170.0

 

 

 

Revenues Above/(Below) "Growth Limit"

–

$15.1

 

 

 

 

While the growth limit would be calculated first for FY 2028 (based on the ongoing revenue level in FY 2027 adjusted for population growth and inflation in CY 2026), the required IIT rate reduction would start first in TY 2028 based on 50% of the structural surplus in FY 2029.  As noted above, since the structural surplus is estimated to be $583.2 million in         FY 2029, the bill would require the TY 2028 IIT rate to be reduced such that the dollar value of that reduction would equal 50% of the structural surplus, or $(291.6) million. 

 

Since the January Baseline revenue projections do not extend into TY 2028/FY 2029, this analysis assumes the TY 2028/ FY 2029 individual income tax revenue base will increase by a standard annual growth rate of 4.5%. Based on that projection, we estimate that a $(291.6) million IIT reduction would require DOR to lower the state's single tax rate from 2.5% to 2.39% in TY 2028.

 

 

 

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 $(291.6) million in FY 2029, overall annual URS distributions would decrease by $(52.5) million in FY 2031.

 

2/19/25