California’s Budget Deficit Blows Up
By The Wall Street Journal Editorial Board, Feb. 10, 2023
California Gov. Gavin Newsom’s budget last month projected a $22.5 billion deficit, but apparently his forecast was too sunny. The Legislative Analyst’s Office (LAO) warned last week that the state’s budget hole may be a lot bigger owing to plunging revenue. Look out below.
The state’s monthly tax revenue in January was about $14 billion lower than during the same month last year. Tax revenue in the current fiscal year that started last July is running about $23 billion lower than in the previous year.
The surprise is that anyone 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 state income taxes. Volatile equity prices and layoffs at Silicon Valley companies are hitting capital gains. Companies are also cutting bonuses.
Corporate tax revenue came in about 20% lower in January than during the previous year, no doubt in part because of declining profits at big tech companies. But it’s also possible that the accelerating exodus of companies from the state may be contributing.
As a result, LAO estimates tax revenue during this fiscal year and the next will likely be $10 billion lower, and the budget gap will likely be about $7 billion larger than the Governor forecasted last month, assuming Democrats restrain spending. What are those odds?
The state experienced a historic $102 billion surplus in the last two fiscal years from federal Covid relief and surging 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, anticipated revenues for 2023-24 remain about 20 percent higher than before the pandemic.”
In other words, the state doesn’t have a revenue problem. It has a spending problem. There’s nothing new under the Sacramento sun.