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Arizona’s budget outlook has improved since last year, but the tentatively solid future is shrouded in uncertainty because economists have no idea which of President Donald Trump’s proposed policies he’ll actually implement versus which ones were just for show.
The good news is that revenues have been better than expected since lawmakers passed the 2025 budget in mid-June, and for the first time in the past two years, economists don’t project a recession, according to one of the private economists on a panel that advises lawmakers on the economy and budget, Danny Court.
In the 2024 fiscal year, which ended June 30, the state took in $425 million more than expected and has continued to bring in more than forecast in the first half of 2025, to the tune of $244 million. That’s a big change from the projected $1.8 billion deficit the state was facing during budget negotiations last year.
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The increased revenues in 2024 were primarily due to one-time Medicaid payments to the state for keeping costs below expectations, according to the Joint Legislative Budget Committee.
Income tax collections decreased by $2.7 billion from 2022 to 2024, after Republicans implemented a 2.5% flat tax, but collections increased by 7.4% so far in fiscal year 2025 contributing to increased revenue. Also contributing were a 11.2% increase in corporate income tax payments and a 3.4% increase in sales tax collections.
With the year ahead looking to tentatively be a solid one for the economy, Republicans who head the state Legislature and Democratic Gov. Katie Hobbs will still have to work together on a package of spending bills that make up the state budget. The two sides have many disagreements on how much money the state should be spending and how best to allocate that money, but they must reach a consensus by June 30, the last day of the fiscal year.
Hobbs’ budget director, Sarah Brown, announced her resignation on Wednesday, the Arizona Republic first reported, following Republicans’ intense scrutiny of the Hobbs’ proposed budget last week.
Christian Slater, a spokesman for Hobbs, told the Arizona Mirror that Brown’s resignation had nothing to do with Republicans’ “partisan attacks” on the executive budget.
Court told the Finance Advisory Committee Thursday that uncertainty surrounding which policies Trump will actually implement leaves his administration’s impact on the economy unclear.
Court said that because Trump made so many conflicting promises, his field’s best guess for how the administration will affect Arizona’s economy is “Who knows?”
“It was hard to take everything at face value and try to model it when the pieces don’t fit together,” Court said.
He pointed out that Trump seemed to mostly take a pro-economic-growth stance with promises to cut taxes, government spending and regulations. But his promises to implement huge tariffs on foreign trade partners, and to deport millions of undocumented immigrants, would run counter to that. Court advised looking at most Trump’s campaign promises as “positioning” rather than planning.
“If the administration is going to be driven by the goal of pro-growth … then the tariffs at the levels that they’re threatened at would be insane,” Court said. “It would be inflationary. It could cause a recession.”
The Trump administration has threatened Canada, Mexico and China with tariffs, but Court said economists hope Trump is using those threats as leverage and that any tariffs actually implemented will be limited and targeted.
“If implemented at the promised levels that they’re talking about, that could be devastating for the economy and really knock us off track when we’re on a really good footing right now,” Court said.
If the Trump administration goes through with mass deportations of undocumented immigrants, as he promised, it would exacerbate the worker shortage that the U.S. and Arizona already face, Court said.
As of November there were 8.1 million unfilled jobs in the country and 6.9 million unemployed people, according to the U.S. Bureau of Labor Statistics. The gap between job openings and unemployment numbers has been closing since 2022, but workforce participation rates have still not recovered to pre-pandemic levels.
As of September, Arizona had 178,000 job openings and 132,400 unemployed people.
“If you take it at face value, reducing the labor supply when we’re already labor constrained would be inflationary,” Court said. “And it could create … some economic distress.”
Inflation has dropped from highs around 13% in 2021 and 2022 to a predicted 2.5% in the year ahead but is also still higher than pre-pandemic levels. Housing costs remain a burden for many Arizonans who are priced out of buying and stressed by increased rents. Court doesn’t expect that to change any time soon because new houses are coming on the market, but they’re unaffordable for the average Arizonan.
Court told lawmakers that lower interest rates on mortgages are likely but that they won’t do much to make buying a home more affordable in Phoenix. Instead, Court said the key to more affordable housing is fewer regulations, more housing supply and more housing that’s affordable for people who make less than six figures.
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