Budget surplus grows to $660 million after strong income tax collections in October

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State tax collections beat forecasts in October, growing more than 25% over the prior year and swelling the budget surplus to $660 million just months before lawmakers return to the Capitol and begin crafting a spending plan for 2026.

Through the first four months of the 2025 fiscal year, state revenues are $235 million more than projected when lawmakers adopted a budget in June. And that’s on top of the $425 million surplus that the state realized when the prior fiscal year closed on June 30.

In a monthly review of state finances, legislative budget analysts noted that October revenues outpaced the forecast by $128 million, led by higher individual income tax collections, which made up $74 million of that. 

The income tax gains were due largely to increased tax withholdings, and buttressed by a 34% drop in refund payments compared to a year ago. 

Those gains edged out unexpected revenue from corporate income taxes, which hit record levels. The Joint Legislative Budget Committee analysts noted that the state collected the most ever “by a significant margin,” beating the forecast by $72 million.

And sales taxes also beat projections by $12 million, growing by 5% over a year ago. For the fiscal year-to-date, sales taxes are up 4% over the same period in 2023.

That was due in part to resurgent contracting sales taxes, which rebounded in October to grow by nearly 13% over the prior year. But not all sales tax categories are faring as well: Tax collections from bars and restaurants grew by just 1.8% in October and are up just 1% in the first four months of the fiscal year, the worst since the height of pandemic restrictions in 2020.

In October, budget analysts noted that there are significant costs on the horizon that lawmakers must address this year, including $183 million in state spending on school building repair and another $140 million for state employee health insurance. 

And then there’s the impending end to Proposition 123, which voters passed in 2014 to settle a lawsuit against the state that accused it of failing to follow a different voter-approved measure requiring K-12 funding increases every year to keep pace with inflation. That measure boosted the amount of money given to schools from the state land trust, a portfolio of land given to Arizona by the federal government to benefit schools and other public entities.

But it expires in 2025, and lawmakers and Gov. Katie Hobbs failed this year to devise a solution to extend those payments. Barring an emergency measure sent to voters in the spring — similar to how Prop. 123 was passed originally — that means roughly $300 million a year will have to come out of the state’s general operating budget.