Trump policies are creating budget headaches for Arizona

Economic uncertainty and federal
funding cuts, both fueled by the actions of the Trump administration and
the Republicans who control Congress, will leave Arizona to make some
difficult budget decisions in the coming months and years, budget
analysts warned state lawmakers on Thursday. 

“The legislature, particularly, has a
lot of policy decisions to make over the next year to two years to
figure out how we’re going to prioritize scarce resources,” Ben
Henderson, the governor’s budget director, said during an Oct. 9 Finance
Advisory Committee meeting. “Given all the chaos and turmoil at the
federal government, the changes that they’re making both to the revenue
and the spending side is something we’re going to have to grapple with.”

The Finance Advisory Committee is a
group of private and public sector economists who advise the Arizona
Legislature about the state’s finances and budget options. 

The Joint Legislative Budget
Committee, the legislature’s team of budget analysts, predicts that the
state could have just $67 million to use on one-time spending — spending
that’s not automatically included in the next year’s budget — when
lawmakers return to work next year to craft a budget that begins July 1,
2026. 

And that’s a problem because some of
the spending that the state technically classifies as “one time”
includes things that the legislature has chosen to fund annually for the
last five or six years. 

“There are several challenges in
terms of trying to accomplish objectives during this upcoming session,”
Richard Stavneak, JLBC’s director, said during the meeting.

At the top of that list are state
employee health insurance subsidies at a cost of $195 million and school
facility repairs at $183 million. If just those two items are included
in the 2027 budget, which Republicans who control the legislature and
Democratic Gov. Katie Hobbs will begin negotiating in January, it would
put the next year’s budget underwater. 

And that’s not even including other
one-time spending from this fiscal year, like $21 million in bonuses for
correctional officers, $16 million for the Arizona Promise scholarship
program for low-income students and $45 million in subsidies for child
care for working parents. 

Lawmakers in the coming year will
also have to grapple with significant changes and cuts to federally
funded programs like Medicaid and the Supplemental Nutrition Assistance
Program, with little guidance from the federal government. 

Arizona typically conforms a portion
of its state income tax code to align with changes at the federal level,
but has not yet made a decision on whether to align with the changes
implemented via Trump’s “One Big Beautiful Bill” passed in July. 

If the state does decide to implement
those changes, Arizona would lose $438 million in the current fiscal
year, $336 million in 2027 and $372 million in 2028. 

“The federal legislation that passed
this summer will have significant consequences, both on the revenue and
spending side of the equation,” Stavneak warned. 

The Arizona Healthcare Cost
Containment System, the state’s Medicaid program known more commonly as
AHCCCS, has asked for an extra $50 million over the next three years to
hire more employees to implement work requirements and more frequent
eligibility checks required by the federal spending bill. The Arizona
Department of Economic Security, which runs SNAP, has asked for $62
million over the same time period to pay administrative costs to avoid
penalties that the federal government will implement based on states’
error rates. 

Arizona isn’t required to fund the
requests from AHCCCS and SNAP, but if they don’t have adequate systems
or staffing to handle program changes, that could lead to big problems. 

In addition to discretionary requests
to deal with Medicaid and SNAP changes, the state will have to pick up a
larger share of SNAP administrative costs next year, totalling an
estimated $33 million, and will pay around $139 million more for SNAP if
its existing error rate remains the same in 2028. 

The state might be able to defray
some of the additional costs if it’s awarded some of the $10 billion
that the federal spending bill sets aside to reimburse states for border
security costs since 2021. 

But although the federal funding bill
said that the U.S. Department of Homeland Security would begin taking
applications for border security reimbursements in early October, it
hasn’t yet provided any way to do that. 

So, both Hobbs and Republican legislative leaders sent separate letters to Department of Homeland Security Secretary Kristi Noem “laying out the state’s case to receive those border security monies” Stavneak said. 

Hobbs asked for $760 million and legislative leaders asked for $744 million. 

“We have collected all of our
receipts, all of our reimbursements,” Henderson said. “We are prepared,
certainly, to talk about and apply for every last cent that we think
Arizona deserves for the border related expenditures that we have spent
over the past couple of years.”

The state is still waiting for instructions from the federal government on how to do that. 

Additionally, Henderson said that the
state doesn’t expect guidance from the federal government on Medicaid
eligibility redetermination or work requirements until June 2026, about
six months before the states are supposed to implement them. That leaves
budgeting for AHCCCS and SNAP difficult. 

“A lot of the agency requests on
implementation for (the federal spending bill) are dependent upon what
the federal government will and won’t allow,” Henderson said. 

While private economist Jim Rounds
said during the committee meeting that he believes Medicaid reform is
necessary, he said he doesn’t agree with the way the Trump
administration is going about it. 

“I think instead of taking a
jackhammer to the current program, it needs to take a scalpel and be a
little bit more careful, and then we have to have a longer period of
time for the states to make adjustments,” he said. “Otherwise, it’s
going to cause shocks and it’s going to hurt individuals and families
and economic growth across the entire country.” 

Stavneak pointed to around $1.7
billion in what he called “stress points” to upcoming budgets, in the
form of the cost of the federal spending bill and “one time” spending
that the state has funded annually for years. 

But he said that if the economy
enters even a mild recession, projected state revenue for 2028 could
drop by $1.8 billion — more than the $1.6 billion the state currently
has socked away in its rainy day fund. The consensus among economists is
that a recession isn’t on the horizon, but Rounds said he predicted the
same outcome for the state if a hypothetical mild recession were to
happen, which he thinks is a possibility. 

Economic growth in Arizona is
expected to be slow, at just 2% this fiscal year, and to gradually
improve over the next few years. 

Rounds said that good gross domestic
product might not be a good indicator of economic health at the moment,
and suggested instead looking at employment and tax collection numbers. 

Muddying the waters when it comes to
GDP are many companies’ decisions to stock up on supplies from outside
the country before tariffs were implemented, and holding off on passing
on increased costs to consumers. 

Rounds explained that the first
company in any industry to increase prices because of tariffs will lose
market share until others raise prices as well, but he predicted that
companies would be forced to begin relaying the cost of tariffs to
consumers next spring. 

“I think a lot of the increases in prices are going to be in front of us,” Rounds said.