A new report from the Arizona Legislature’s Joint Legislative Budget Committee shows Arizona is in great economic condition, breaking records. Revenues from taxes are high or better than projected, with significant gains expected in the future, and personal income is growing at the fastest pace since 1985.
This report comes after Arizona passed historic tax cuts, reducing the personal income tax to the lowest flat tax in the country at 2.5%. However, some of the rosy picture is due to COVID-19 relief.
Governor Doug Ducey issued a statement about the report, “It paints a picture of a state economy that has emerged from the COVID-19 pandemic not only in great shape, but poised to achieve even greater accomplishments in the years ahead. The ‘extraordinary growth’ Arizona saw in Fiscal Year (FY) 2021 is positive news for every Arizonan. We are leading the way in the nation’s economic recovery.”
General Fund revenues broke the modern record for percentage growth in a year, growing by 28.8%. They ended up at $14.17 billion, $487 million higher than forecast. Revenues in June 2021, when the Fiscal Year ended, were 30.4% higher than a year ago. The cash balance is projected to be $929 million.
There was a 66% increase in taxable corporate gains. Corporate income tax revenues surged to the third highest ever, since FY 2007 when the rate was almost 7% compared to the current rate of 4.9%.
Some of the good news can be explained due to COVID-19 relief. Arizona personal income grew 13%, the highest growth rate in 35 years, due to $32 billion in federal pandemic aid that accounted for 80% of it. That aid also contributed to a 16% increase in sales tax collection and 18% growth in individual income tax liability.
The pandemic influenced consumer spending, shifting from things such as recreation and transportation services, which are not subject to sales tax, to durable goods like motor vehicles and housing appliances, which are.
Sales tax from restaurants and bars has recovered to pre-pandemic levels, although employment levels are still lower. Restaurant reservations are 12.9% higher than in 2019. However, amusement and hotels/motels have not fully recovered, with the former declining 32.5% in revenues and the latter 12.5%. Hotel occupancy is up 26.4% higher than in May 2020, during the early months of the pandemic.
Unemployment is turning around. The seasonally adjusted unemployment rate was 6.8% in June. In June 2020, it was 10.7%. The number of new unemployment claims has reverted to pre-pandemic levels.
A small factor influencing the growth was due to deferring two income tax periods, the July 2020 filing deferred from April 2020 and the May 2021 filing. But even without the July 2020 filing, overall revenues would have grown 18.4%.
Arizona has a large rainy day fund in recent years under Ducey, hovering near $1 billion. State revenues were doing so well that in 2019, Ducey signed a bill increasing the cap on the fund from 7% to 10%. Critics often claim there is not enough money for public schools, but even with COVID-19 the state only spent $55 million of it during 2020 on one-time public health expenses.
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