California Governor Gavin Newsom’s budget last month predicted a $22.5 billion deficit, but apparently his forecast was too bright. The Legislative Analyst’s Office (LAO) warned last week that the state’s budget gap could widen due to declining revenues. Watch out Downstairs.
The state’s monthly tax revenues in January were about $14 billion lower than the same month last year. Tax revenue in the current fiscal year, which began last July, is about $23 billion lower than the previous year.
The surprise is that everyone is surprised. California’s top income tax rate is 13.3% on earners making more than $1 million. The top 0.5% of California taxpayers pay 40% of income taxes. Volatile stock prices and layoffs at Silicon Valley companies lead to capital gains. Companies are also cutting bonuses.
Corporate income tax revenues in January were about 20% lower than in the previous year, no doubt partly due to falling profits at major tech companies. But it is also possible that the accelerated exodus of companies from the state contributes to this.
As a result, LAO estimates tax revenues likely to be $10 billion lower during this fiscal year and the next, and the budget gap is likely to be about $7 billion larger than the governor predicted last month, assuming Democrats cap spending. What are those opportunities?
The state experienced a historic surplus of $102 billion over the past two fiscal years from federal Covid aid and rising capital gains, which it used to expand entitlement programs and increase climate spending. But LAO notes that “while revenues are moderating from the recent peak, they are still above average historical levels” and “even after adjusting for inflation, projected revenues for 2023-24 remain about 20 percent higher than before the pandemic .”
In other words, the state has no revenue problem. It has a spending problem. There is nothing new under the Sacramento sun.
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