California's Budget Deficit Skyrockets

Feb 19, 2023 11:51 am ET

California Gov. Gavin Newsom smiles January 6 in front of the California State Capitol in Sacramento.

Photo: Yalonda M. James/Associated Press

California Gov. Gavin Newsom’s budget projected a $22.5 billion deficit last month, but apparently his forecast was too sunny. The Legislative Analyst’s Office (LAO) warned last week that the state’s budget gap could be much larger due to falling revenues. Look out below.

The state’s monthly tax revenue in January was about $14 billion lower than in the same month last year. Tax revenue for the current fiscal year, which began last July, is about $23 billion below last year’s.

The surprise is that everyone is surprised. California’s top income tax rate is 13.3% for earners earning more than $1 million. The top 0.5% of California taxpayers pay 40% of state income taxes. Volatile stock prices and layoffs at Silicon Valley companies hurt capital gains. Companies are also cutting bonuses.

Corporate tax receipts in January were about 20% lower than a year earlier, no doubt due in part to declining profits at large tech companies. However, the increasing exodus of companies from the country may also contribute to this.

As a result, LAO is estimating tax revenue likely $10 billion lower this fiscal year and next, and the budget gap is likely to be about $7 billion larger than the governor forecast last month, assuming Democrats limit spending. What are these odds?

The state posted a historic $102 billion surplus from federal Covid relief over the past two fiscal years and soaring capital gains, which it used to expand entitlement programs and boost climate spending. However, LAO notes that “revenues, while declining from the recent peak, are still above historical average levels” and “even after adjusting for inflation, expected revenue for 2023-24 remains about 20 percent higher than pre-pandemic levels.”

So the state has no revenue problem. It has a spending problem. There’s nothing new under the Sacramento sun.

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