The good times may soon be over for the California government.
The nation’s most populous state has had so much money lately that lawmakers have been spending freely — handing out free health care to low-income immigrants, paying for every 4-year-old to attend the kindergarten and sending more than $21 billion in stimulus checks to taxpayers over the past two years.
This seemingly endless flow of money has begun to dry up as state tax revenues have fallen below expectations for four straight months. There is now an 80% chance that California will be short about $8 billion by the end of its fiscal year next summer, according to the latest estimate from the nonpartisan Office of the Legislative Analyst.
There is still plenty of time for a comeback, but the downward revenue trend is already having an impact. Last month, Democratic Gov. Gavin Newsom blocked a tax cut for manufacturers, halted the expansion of full-day kindergarten programs and cut unemployment benefits for immigrants living in the country without legal permission, while citing the potential shortfall in state revenue.
“These deficits will not only come, but they will be significant and we will have to make some adjustments,” Newsom said. “We are currently working with the Legislative Assembly to do just that.”
Despite the shortfall, California is unlikely to be headed for another cash flow crisis like the one that engulfed the state during the Great Recession more than a decade ago. California had less than $8 billion available to spend at the end of September 2008 during the Great Recession. This year, California has over $130 billion, including $37.2 billion in its various savings accounts.
“I think the state is much better positioned for a potential economic downturn this time around than it has been in contemporary history,” said Chris Hoene, executive director of the California Budget & Policy Center.
What’s happening in California could be a sign of troubling things to come for other states. Nationally, tax collections in most states appear to be above expectations so far, according to Brian Sigritz, director of state tax studies for the National Association of State Budget Officers. the state. But incomes are growing much more slowly, with states anticipating an average increase of 1.4% this year, compared to a jump of 16.5% in 2021.
The problem in California is not employment, because the state has many people who work and pay taxes. California’s unemployment rate hit a record high in September and employment is nearly back to pre-pandemic levels, though hiring has slowed in recent months.
Instead, the problem is a declining stock market, which means the rich aren’t making as much money. It’s a problem in California, where a progressive tax system means the top 1% pay nearly half of state income taxes.
The most important factor has been the government’s attempts to slow the skyrocketing cost of goods and services due to inflation. The Federal Reserve did this by raising a key interest rate, which had a cascading effect on the rest of the economy. As a result, the S&P 500, an index of 500 publicly traded companies across major US industries, fell more than 18% from its January peak.
A falling stock market means tech startups have less incentive to sell stocks to the public. “Going public” tech companies have been a reliable source of cash for the California government because it makes a lot of people very rich very quickly — and all the money that’s taxable.
Last year, 206 California-based companies went public, creating a huge tax revenue windfall for the state. Fewer than 50 California-based companies will go public this year, according to an estimate by the California Department of Finance, the Newsom administration’s budget agency.
“That doesn’t mean technology itself isn’t a source of strength, although it may not be as rapidly growing a source of revenue as it was a year ago for the general fund of state,” said UCLA faculty director Jerry Nickelsburg. Anderson Forecast, which projects economic trends.
California collects the majority of its income taxes in April, the deadline for people to file their state tax returns. But the state gets money every month through “tax deductions” — the money that companies withhold each month from workers’ paychecks and send it to the government. These revenues have fallen considerably since June.
“What this suggests to our forecasters is that there have been layoffs and cutbacks in some of the high-wage, high-tech sectors of the state’s economy,” the spokesperson said. of the Department of Finance, HD Palmer. “It’s a reflection of stock market volatility.”
It could also signal some volatility between Newsom and the Democratic-controlled California state legislature. This year, Newsom chastised lawmakers for passing bills late in the session that, when added together, would have enabled $22 billion in new spending that went unaccounted for in the state budget.
Newsom called the proposed spending “remarkable.” He blocked most of them by vetoing those bills in September.
“I’ve made it clear that we’re seeing economic headwinds,” Newsom said.
Assembly Speaker Anthony Rendon, a Democrat from Los Angeles, said lawmakers were making proposals to benefit their districts and the people of California.
“What’s remarkable is that the Senate and the Assembly have been able to come together on the budget in recent years,” Rendon said. “We’ve worked with the administration to make California’s budget stronger, more resilient, and just plain better. We have more reserves and more liquidity than ever before. Our differences are minor compared to this achievement.
Toni Atkins, the pro tempore Democratic president of the California Senate, said it was too early to know what next year’s budget will look like. But she said “we are more prepared than ever to protect our progress and withstand falling incomes without harmful program cuts or middle-class tax increases.”
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