ARTICLE
California’s budget deficit is back and the Governor and the California Legislature will have empty pockets as the state scrambles to meet the June 15 deadline to authorize a 2023-2024 spending plan. California’s budget revenues, particularly income taxes, are continuing to fall below expectations, indicating that the deficit will continue to rise, posing a political dilemma for Gov. Gavin Newsom and legislators. Less than nine months ago, the Governor and the Legislature were touting the significant economic improvements many Californians were experiencing — and the topper, the state, was handing out over $1.1 billion in tax rebates. The Chamber eNews of June 2022 reported the story: Chamber eNews June 2022. There is deep concern in Sacramento that instead of handing out dollars for special interest programs, the Governor and Legislative leaders are now facing difficult decisions seeing a potential $30 billion deficit — what programs are cut or significantly reduced and where does ‘new revenue’ come to California? Through February, the Newsom administration reported, revenues were running nearly $5 billion below expectations and they fell short by nearly $1 billion more in March. The numbers bolster contentions by the Legislature’s budget analyst, Gabe Petek, that the state’s fiscal situation was worse than Newsom was admitting. In his initial response to the January budget, Petek said, “Our estimates suggest that there is a good chance that revenues will be lower than the administration’s projections for the budget window, particularly in 2022-23 and 2023-24.” Some Legislative leaders are suggesting that the federal stimulus funds and the Inflation Reduction Act funds will bring new infrastructure projects to California and the jobs that come along with those construction projects. Those projects only materialize with matching local and state funds. Back in January, when the blush of excitement about California’s economy started to fizzle under the Federal Reserve’s plan to increase rates over the last year to curb inflation has not materialized or stabilized specific industries— high tech and the large capital gains taxes that come from tech workers — as well as the logistics industry. As revenues continue to fall short, expectations will have to shrink further, the competition for money among budget stakeholders will become more intense and the pressure on Newsom and legislators will increase. Some suggest the legislature may be tempted to do something that Newsom says he doesn’t want to do: tap into the state’s “rainy day” reserves to relieve stakeholder pressure. The reserves are meant to be used during a severe economic downturn, but California’s fiscal problem is occurring during a relatively prosperous post-pandemic recovery. The shortfall in revenues is occurring because of the state’s narrowly based revenue system, one that is largely dependent on the earnings of high-income taxpayers, particularly in the shaky technology sector. The state’s tax structure, which relies in large part on taxing the incomes of the wealthiest Californians, often translates into dips when Silicon Valley and Wall Street are uneasy, as they are now. Alphabet, the parent company of Google, one of the state’s largest corporations, said in January that it was cutting 12,000 workers worldwide and Silicon Valley Bank, a key lender to tech start-ups, collapsed last month, sending the federal government scrambling to limit the fallout. This has coincided with a drop in venture capital funding as rising interest rates and recession fears have led investors to become more risk-averse. That money, which declined 36 percent globally from 2021 to 2022, according to the management consulting firm Bain & Company, is critical to Silicon Valley’s ability to create jobs. Next month, Governor Newsom will give us an update that is entitled “Budget Revise or May Revise’ which provides an update from the January budget announcement. The Legislature will move through the budget discussion and bring back the 2023-2024 budget, hopefully before the June 15 deadline. As you might recall hearing about the federal and state government actions to allow filing your taxes in October instead of April if you reside in a county that had a declared emergency declaration. Only three of California's 58 counties are required to file taxes by last Tuesday’s April 15th deadline. Every other county has until October 16. What we don’t know is how many taxpayers will take advantage of the new deadline and whether it will impact the revenue for California. Let’s keep a careful eye on the Governor and the Legislature’s action in the next two months.
California’s budget deficit is back and the Governor and the California Legislature will have empty pockets as the state scrambles to meet the June 15 deadline to authorize a 2023-2024 spending plan.
California’s budget revenues, particularly income taxes, are continuing to fall below expectations, indicating that the deficit will continue to rise, posing a political dilemma for Gov. Gavin Newsom and legislators.
Less than nine months ago, the Governor and the Legislature were touting the significant economic improvements many Californians were experiencing — and the topper, the state, was handing out over $1.1 billion in tax rebates. The Chamber eNews of June 2022 reported the story: Chamber eNews June 2022.
There is deep concern in Sacramento that instead of handing out dollars for special interest programs, the Governor and Legislative leaders are now facing difficult decisions seeing a potential $30 billion deficit — what programs are cut or significantly reduced and where does ‘new revenue’ come to California?
Through February, the Newsom administration reported, revenues were running nearly $5 billion below expectations and they fell short by nearly $1 billion more in March.
The numbers bolster contentions by the Legislature’s budget analyst, Gabe Petek, that the state’s fiscal situation was worse than Newsom was admitting. In his initial response to the January budget, Petek said, “Our estimates suggest that there is a good chance that revenues will be lower than the administration’s projections for the budget window, particularly in 2022-23 and 2023-24.”
Some Legislative leaders are suggesting that the federal stimulus funds and the Inflation Reduction Act funds will bring new infrastructure projects to California and the jobs that come along with those construction projects. Those projects only materialize with matching local and state funds.
Back in January, when the blush of excitement about California’s economy started to fizzle under the Federal Reserve’s plan to increase rates over the last year to curb inflation has not materialized or stabilized specific industries— high tech and the large capital gains taxes that come from tech workers — as well as the logistics industry.
As revenues continue to fall short, expectations will have to shrink further, the competition for money among budget stakeholders will become more intense and the pressure on Newsom and legislators will increase.
Some suggest the legislature may be tempted to do something that Newsom says he doesn’t want to do: tap into the state’s “rainy day” reserves to relieve stakeholder pressure.
The reserves are meant to be used during a severe economic downturn, but California’s fiscal problem is occurring during a relatively prosperous post-pandemic recovery. The shortfall in revenues is occurring because of the state’s narrowly based revenue system, one that is largely dependent on the earnings of high-income taxpayers, particularly in the shaky technology sector.
The state’s tax structure, which relies in large part on taxing the incomes of the wealthiest Californians, often translates into dips when Silicon Valley and Wall Street are uneasy, as they are now. Alphabet, the parent company of Google, one of the state’s largest corporations, said in January that it was cutting 12,000 workers worldwide and Silicon Valley Bank, a key lender to tech start-ups, collapsed last month, sending the federal government scrambling to limit the fallout.
This has coincided with a drop in venture capital funding as rising interest rates and recession fears have led investors to become more risk-averse. That money, which declined 36 percent globally from 2021 to 2022, according to the management consulting firm Bain & Company, is critical to Silicon Valley’s ability to create jobs.
Next month, Governor Newsom will give us an update that is entitled “Budget Revise or May Revise’ which provides an update from the January budget announcement. The Legislature will move through the budget discussion and bring back the 2023-2024 budget, hopefully before the June 15 deadline. As you might recall hearing about the federal and state government actions to allow filing your taxes in October instead of April if you reside in a county that had a declared emergency declaration. Only three of California's 58 counties are required to file taxes by last Tuesday’s April 15th deadline. Every other county has until October 16. What we don’t know is how many taxpayers will take advantage of the new deadline and whether it will impact the revenue for California. Let’s keep a careful eye on the Governor and the Legislature’s action in the next two months.