January FAC baseline shows a roughly $578 million discretionary cushion; tax conformity remains the largest un‑funded risk
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Summary
Staff told the Finance Advisory Committee that the January revenue baseline projects multi‑year positive cash balances with roughly $578 million available for discretionary use, but noted major items — including federal tax conformity, recurring one‑time spending, and executive budget assumptions — are not included in the baseline and could erode that cushion.
At the Finance Advisory Committee’s January meeting, staff presented the January baseline update for Arizona General Fund revenues and projected that the lowest projected available cash balance across the forecast horizon is roughly $578,000,000, which staff described as the discretionary cushion.
The baseline update, staff said, updates revenues through fiscal 2029 and does not include a range of policy choices currently pending in the 2026 legislative session. “We say $578,000,000 because in ’28, if you went above that amount in allocating resources, you would then be in shortfall for that year,” staff stated during the presentation.
Why it matters: Jack Brown of the budget staff emphasized that the baseline is strictly a revenue update and that several large items are excluded. The largest single conformity exposure the presentation flagged was straight conformity with the 2025 federal tax law (HR 1): staff put the cost of straight conformity at about $1,400,000,000. The presentation also noted that the governor’s 4‑year conformity cost estimate is roughly $750,000,000 and that Senate Bill 1106 (passed by the Legislature and later vetoed, as noted in the presentation) had a similar gross cost to straight conformity.
Staff also identified near‑term recurring items that have often been funded on a one‑time basis and which the baseline does not assume are ongoing appropriations. Examples called out in the presentation included state employee health insurance (JLBC staff cited a baseline figure of about $195,000,000 versus an executive proposal totaling about $273,000,000) and school facility building repairs (about $183,000,000). The presenters said those two items alone would consume a material portion of the available cushion.
The presentation also outlined additional executive assumptions and proposals that are not built into the baseline, including: a $760,000,000 federal reimbursement assumption for border security costs; an executive federal tax conformity proposal that staff summarized as producing a ~$480,000,000 two‑year revenue impact in '26–'27; a proposed increase in the sports‑betting operator tax rate from 10% to 45% for operators meeting a high‑volume threshold; a proposed TPT exemption change for data‑center equipment; and increased lottery marketing assumptions.
Tax‑form and amended‑return timing: Staff warned the committee that the Department of Revenue’s (DOR) 2025 income tax forms currently assume conformity with HR 1 and that policy choices that diverge from what is on those forms would create a workload of amended returns. The presentation noted that some testimony in committee hearings has suggested a sizeable share of taxpayers might need to amend returns, but staff described such estimates as speculative and said the ultimate amendment workload depends on the final policy resolution. Using the state’s statutory framework as an example, staff pointed out that, for some differences (such as a more generous SALT deduction on DOR forms that is later not adopted in statute), taxpayers could have until October 2027 to file an amended return, meaning the revenue and administrative effects would play out over multiple fiscal years.
What staff recommended: The baseline presenters stressed that the January baseline’s purpose is to update revenue and statutory funding formulas under current law and to highlight the difference between a revenue baseline and the policy decisions that remain. They urged recognition of the timing, administrative, and revenue‑accounting complications that would result from adopting a conformity approach different from the forms taxpayers are using in the field.
Next steps: JLBC staff said they will update projections again in April. The committee’s discussion closed without any formal motions or votes recorded in the transcript.
