Budget Surplus Soars to $660 Million Driven by Robust October Income Tax Revenues

In October, Arizona’s state tax collections exceeded expectations, showing a remarkable increase of over 25% compared to the previous year. This surge has pushed the budget surplus to $660 million as lawmakers prepare to tackle the 2026 spending plan.

For the first four months of the 2025 fiscal year, state revenues have outstripped initial projections by $235 million. This comes in addition to the $425 million surplus recorded when the previous fiscal year closed on June 30.

A recent monthly analysis by legislative budget analysts highlighted that October’s revenues surpassed forecasts by $128 million. Higher individual income tax collections were a major contributing factor, accounting for $74 million of the surplus.

The increase in income tax revenues was primarily attributed to heightened tax withholdings, along with a significant 34% reduction in refund payments compared to the previous year. This positive trend was complemented by unexpected corporate income tax revenue, which reached record levels, exceeding forecasts by $72 million.

Sales tax collections also performed well, exceeding predictions by $12 million and increasing by 5% year-on-year. Overall, sales tax revenues are up 4% for the fiscal year to date compared to the same period in 2023.

Particularly strong were the contracting sales taxes, which rebounded dramatically in October, climbing nearly 13% from the previous year. However, difficulties remain in some areas; sales tax revenues from bars and restaurants rose only 1.8% in October and are up just 1% for the fiscal year, marking the slowest growth since the peak of pandemic restrictions.

Reflecting on future challenges, budget analysts noted that significant expenditures loom, including $183 million for school building repairs and an additional $140 million for state employee health insurance. Moreover, the upcoming expiration of Proposition 123 in 2025 poses a critical issue.

Initially approved by voters in 2014, this proposition aimed to address a lawsuit over K-12 funding. It allowed increased financial support from the state land trust to schools. However, failure to create an extension this year could lead to a $300 million annual deficit in the state’s general operating budget once the measure expires.