How California plans to solve its large budget deficit
How California plans to solve its large budget deficit
California, home of the fifth largest economy in the world, is facing a bit of a budget mess. This week, Governor Gavin Newsom unveiled his proposal to patch a $38 billion budget deficit. Another estimate has California’s deficit at $68 billion — an all time record.
Last year, the IRS extended the tax filing deadline for most Californians, basically because it felt bad most of the state had been on fire in 2023. And that basically messed up the state’s cash flow.
“I think it’s reasonably fair to say that climate change played a role in the timing challenges of the state’s budget shortfall,” said Chris Hoene, who heads the California Budget and Policy Center.
The Golden State’s progressive income tax system depends a lot on rich people’s capital gains, which means it depends a lot on their stock portfolios. While tech stocks have done pretty well the past year or so, there haven’t been many new tech stocks.
“So when we have a lot of IPO activity and a lot more people getting rich fast, the state’s revenue system picks that up,” said Hoene. “But we had a really significant decline in IPOs over the last year, year and a half.”
While the sheer size of California’s deficit makes it an outlier, it is by no means alone in its budget woes, even with the economy doing pretty well across the country. Many states’ longstanding money problems were papered over the past couple of years by $350 billion in federal pandemic aid.
“Illinois, or Pennsylvania, or New Jersey, or Alaska, where this is really just a return to the story where their spending demands are higher than their revenue,” noted Josh Goodman, a researcher at Pew Charitable Trusts.
Other states like Arizona cut taxes the past two years, which is hurting revenue now. Plus, because of inflation, that revenue doesn’t stretch as far as it used to — especially for employees lured by rising wages in the private sector.
“States have had big problems with having enough prison guards, making sure their school systems have enough bus drivers,” said Goodman.
The good news is most states have pretty decent rainy day funds. California will be tapping its “break glass in case of deficit” piggy bank to ease budget cuts.
All things considered, state budgets are doing OK, according to Richard Auxier at the Tax Policy Center. Which is good news for the private sector too.
“State and local governments spend an incredible amount of money that accounts for a huge chunk of our economy,” he said. “State and local governments employ a huge number of people.”
About one in seven American workers, to be precise.
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