ARTICLE
In mid-January 2023, Governor Newsom announced California’s 2023-2024 budget. The Chamber took note of news reports at the Governor’s press briefing. Newsom insisted “we’re keeping promises,” in releasing the 2023-2024 state budget as a $297 billion spending plan that is 3.6% smaller than last year’s budget. At that time, the Governor intended to keep his ‘big promises' despite what was labeled a modest shortfall. Fast forward to last Friday, May 12, 2023, as the Governor released a new budget (the May Revise) with the usual fanfare remarks: “The May Revision continues the commitment to all Californians by emphasizing education, protecting the environment, preparing the state’s workers for the next decade, readying the economy for the next made-in-California innovation, and maintaining tens of billions of dollars of investments in much needed infrastructure.” As we have stated while reporting on California’s Budget on an annual basis, one constant is clear: California’s progressive tax system, where nearly half of all personal income tax in the state is paid by the top one percent of earners, has contributed to extreme budget volatility over the years. Maintaining budget stability requires long-term planning in the face of these revenue fluctuations. The 2023-24 May Revise to the Governor's original Budget proposes spending of $306.5 billion in total state funds, consisting of approximately $224.1 billion from the General Fund, $79.5 billion from special funds, and $2.9 billion from bond funds. The simple fact is that following two years of unprecedented growth, revenue has fallen short of monthly estimates since the 2022 budget was approved last June 2022. According to the 2023-2024 Budget release, “Consistent underperformance in personal income tax withholding in the second half of 2022, which tracked to the 19.4-percent decline in the S&P 500 for the year, translated into lower revenue from the small share of taxpayers whose higher incomes can vary substantially with market volatility. Combined with high inflation and a tightening of federal monetary policy, this led to the $22.5 billion shortfall projected in January and now $31.5 billion shortfall in the May Revision.” Why is the Chamber spending time on reporting about the state’s budget? Every facet of the state’s spending plan rolls downhill to the local government which relies on these funds to supplement local revenue streams. When times are good, federal and state revenues bring about funds for education, health and welfare services, transportation, housing and funds for infrastructure projects. When the economy slows as we have seen over the last 12 months, consumer confidence wanes and the purchasing power slows too. Add to the dynamics of global influences, higher prices for goods, gas and energy collide with the supply chain debacle and the weather disasters our region has faced with atmospheric rain. The growth in risk factors into how the Governor and the State Legislature will negotiate a final budget deal next month. Here is a summary of the warning signs directly for the May Revise. The Economic Fallout from a Debt Limit Impasse—With the federal government projected to be unable to meet its financial obligations by early June without Congressional action to raise the debt limit, an unprecedented federal default threatens to cause global economic turmoil and negative stock market reactions. Given the link between financial markets and the state’s revenues, this is a near-term risk. Higher Interest Rates—In early May, the Federal Reserve raised interest rates by a quarter point to a range of 5 to 5.25 percent—its tenth-rate hike since March 2022. These actions represent the Federal Reserve’s ongoing efforts to bring inflation under control. However, additional rate increases—or even sustained inflation above 3 percent or 4 percent without further increases—could further slow the economy. Uncertainty in Financial Institutions—The first four months of 2023 have seen three major regional bank failures. While swift action by federal and state financial regulators has stabilized the situation to date, uncertainty remains in the financial system. Delayed Tax Receipts from Fall Filing Deadlines—The Internal Revenue Service’s decision (and the state’s subsequent conformity) to delay 2023 tax filing deadlines to October due to the winter storms affects more than 99 percent of California’s tax filers in 55 of the state’s 58 counties. As a result, the May Revision forecasts roughly $42 billion in scheduled tax receipts will be delayed until October 2023. Of this amount, $28.4 billion is in personal income tax—the state’s largest source of General Fund revenue—and $13.3 billion in corporation tax. This represents around 23 percent of projected personal income tax and 32 percent of corporate tax revenues for the current fiscal year. This is the first time income taxes have been delayed until the fall, inserting a new level of uncertainty to the May Revision revenue forecast and increasing the risk that receipts will not track with budget projections. The Governor has made clear the reductions in spending are to delay some funding programs while maintaining prudence for the year ahead. “These risks noted above underscore the reason that the May Revision does not reflect a withdrawal from the Budget Stabilization Account (BSA) to close the projected shortfall. Should downward economic and fiscal conditions persist and/or any of the risks identified above be realized, this reserve will help protect the state from having to make the kind of drastic reductions to core programs that marked the state’s efforts to close significant deficits in the past.” During the next few weeks, leading up to the June 15 deadline to produce a final budget, the discussions between the Governor and the State Senate and Assembly leaders will try in good faith to negotiate a deal. Today, a budget deal no longer requires a two-third legislative approval so this conversation will be decided by the Governor and Democratic legislators. Newsom’s budget would put the brakes on spending, including clawing back some appropriations from last year. Advocacy groups are leaning on friendly legislators to do whatever is necessary to keep the money flowing, including tax increases and/or tapping into the reserves, which the Governor has stated he will not do. One-party control of the Capitol may change the specifics of the budget conversation but won’t make them any simpler. Let’s see where this leaves us next month.
In mid-January 2023, Governor Newsom announced California’s 2023-2024 budget. The Chamber took note of news reports at the Governor’s press briefing. Newsom insisted “we’re keeping promises,” in releasing the 2023-2024 state budget as a $297 billion spending plan that is 3.6% smaller than last year’s budget. At that time, the Governor intended to keep his ‘big promises' despite what was labeled a modest shortfall.
Fast forward to last Friday, May 12, 2023, as the Governor released a new budget (the May Revise) with the usual fanfare remarks: “The May Revision continues the commitment to all Californians by emphasizing education, protecting the environment, preparing the state’s workers for the next decade, readying the economy for the next made-in-California innovation, and maintaining tens of billions of dollars of investments in much needed infrastructure.”
As we have stated while reporting on California’s Budget on an annual basis, one constant is clear: California’s progressive tax system, where nearly half of all personal income tax in the state is paid by the top one percent of earners, has contributed to extreme budget volatility over the years. Maintaining budget stability requires long-term planning in the face of these revenue fluctuations.
The 2023-24 May Revise to the Governor's original Budget proposes spending of $306.5 billion in total state funds, consisting of approximately $224.1 billion from the General Fund, $79.5 billion from special funds, and $2.9 billion from bond funds. The simple fact is that following two years of unprecedented growth, revenue has fallen short of monthly estimates since the 2022 budget was approved last June 2022. According to the 2023-2024 Budget release, “Consistent underperformance in personal income tax withholding in the second half of 2022, which tracked to the 19.4-percent decline in the S&P 500 for the year, translated into lower revenue from the small share of taxpayers whose higher incomes can vary substantially with market volatility. Combined with high inflation and a tightening of federal monetary policy, this led to the $22.5 billion shortfall projected in January and now $31.5 billion shortfall in the May Revision.”
Why is the Chamber spending time on reporting about the state’s budget? Every facet of the state’s spending plan rolls downhill to the local government which relies on these funds to supplement local revenue streams. When times are good, federal and state revenues bring about funds for education, health and welfare services, transportation, housing and funds for infrastructure projects. When the economy slows as we have seen over the last 12 months, consumer confidence wanes and the purchasing power slows too. Add to the dynamics of global influences, higher prices for goods, gas and energy collide with the supply chain debacle and the weather disasters our region has faced with atmospheric rain.
The growth in risk factors into how the Governor and the State Legislature will negotiate a final budget deal next month. Here is a summary of the warning signs directly for the May Revise.
The Economic Fallout from a Debt Limit Impasse—With the federal government projected to be unable to meet its financial obligations by early June without Congressional action to raise the debt limit, an unprecedented federal default threatens to cause global economic turmoil and negative stock market reactions. Given the link between financial markets and the state’s revenues, this is a near-term risk. Higher Interest Rates—In early May, the Federal Reserve raised interest rates by a quarter point to a range of 5 to 5.25 percent—its tenth-rate hike since March 2022. These actions represent the Federal Reserve’s ongoing efforts to bring inflation under control. However, additional rate increases—or even sustained inflation above 3 percent or 4 percent without further increases—could further slow the economy. Uncertainty in Financial Institutions—The first four months of 2023 have seen three major regional bank failures. While swift action by federal and state financial regulators has stabilized the situation to date, uncertainty remains in the financial system. Delayed Tax Receipts from Fall Filing Deadlines—The Internal Revenue Service’s decision (and the state’s subsequent conformity) to delay 2023 tax filing deadlines to October due to the winter storms affects more than 99 percent of California’s tax filers in 55 of the state’s 58 counties. As a result, the May Revision forecasts roughly $42 billion in scheduled tax receipts will be delayed until October 2023. Of this amount, $28.4 billion is in personal income tax—the state’s largest source of General Fund revenue—and $13.3 billion in corporation tax. This represents around 23 percent of projected personal income tax and 32 percent of corporate tax revenues for the current fiscal year. This is the first time income taxes have been delayed until the fall, inserting a new level of uncertainty to the May Revision revenue forecast and increasing the risk that receipts will not track with budget projections.
The Governor has made clear the reductions in spending are to delay some funding programs while maintaining prudence for the year ahead. “These risks noted above underscore the reason that the May Revision does not reflect a withdrawal from the Budget Stabilization Account (BSA) to close the projected shortfall. Should downward economic and fiscal conditions persist and/or any of the risks identified above be realized, this reserve will help protect the state from having to make the kind of drastic reductions to core programs that marked the state’s efforts to close significant deficits in the past.”
During the next few weeks, leading up to the June 15 deadline to produce a final budget, the discussions between the Governor and the State Senate and Assembly leaders will try in good faith to negotiate a deal. Today, a budget deal no longer requires a two-third legislative approval so this conversation will be decided by the Governor and Democratic legislators. Newsom’s budget would put the brakes on spending, including clawing back some appropriations from last year. Advocacy groups are leaning on friendly legislators to do whatever is necessary to keep the money flowing, including tax increases and/or tapping into the reserves, which the Governor has stated he will not do.
One-party control of the Capitol may change the specifics of the budget conversation but won’t make them any simpler. Let’s see where this leaves us next month.