by Mish Shedlock, Mish Talk:
The boom-bust cycle in California is back to bust again. Governor Newsom faces some tough economic and political choices.
My, How Things Change
As California’s state budget morphs from a $97.5 billion surplus to a multi-billion-dollar deficit, it’s another reminder about the volatility of the state’s revenue system.
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Gov. Gavin Newsom’s penchant for braggadocio was in full flower eight months ago when he declared that California had a $97.5 billion budget surplus and boasted that “no other state in American history has ever experienced a surplus as large as this.”
A more subdued Newsom acknowledged that the projected surplus had morphed into a $22.5 billion shortfall. He proposed a $297 billion 2023-24 budget that throttles back some of the additional spending and indirectly borrows billions of dollars to close the gap.
Gotta love the borrowing to close the gap, idea. But why can’t we all borrow our way to to fiscal health?
California’s Legislative Analyst’s Office projects a 2024-25 budget deficit twice as large as 2023-24. It says the state could dip into reserves and cut some one-time spending.
With tax revenues in a free fall comparable to the Great Recession and the dot-com bust, California faces a projected $68 billion budget deficit next year that will require spending cuts and reserve funds to close, state finance officials said today.
The new estimate from the nonpartisan Legislative Analyst’s Office, released as Gov. Gavin Newsom finalizes his January budget proposal, reflects a substantially delayed tax-filing period this fall where collections came in far below what lawmakers expected when they adopted a spending plan over the summer.
Legislative analyst Gabriel Petek cautioned that California is better prepared to respond to the situation than during the economic recession 15 years ago, because it has since built several multibillion-dollar rainy-day funds, though the state is also looking at a structural deficit of about $30 billion annually going forward.
“I go with the word ‘serious.’ A serious budget problem,” Petek said during a briefing with journalists. “I would stop short of calling it a crisis.”
California’s Tax Revenue Falls
Politico reports California’s Budget Deficit Swells to Record $68B as Tax Revenue Falls
The latest deficit figure — calculated by the nonpartisan Legislative Analyst’s Office and released Thursday — far exceeds the $14.3 billion estimate from June. The shortfall, which is the highest in dollar terms but not as a percentage of overall spending, threatens to upend the upcoming legislative year by forcing Gov. Gavin Newsom and lawmakers to make spending cuts on a scale few term-limited elected officials in Sacramento have faced.
“The state remains in a good cash position, and that really wasn’t the case back at the start of the Great Recession,” Legislative Analyst Gabriel Petek told reporters. “We don’t face the same kind of liquidity challenges that we had at that time, and so I would stop short of describing it as a crisis.”
Newsom’s Department of Finance earlier this year warned California would continue to face a revenue downturn due to stock market declines, interest rate hikes and inflation.
A smaller deficit last year forced the governor to make the largest cuts of his tenure after years of massive surpluses. The state avoided deeper reductions by delaying spending and shifting money between the state’s general and special funds.
Did Democrats think near-zero interest rates would last forever, asks the Wall Street Journal. Do they think at all is a better question in my estimation.
The Legislative Analyst blames California’s plunging revenue on the Federal Reserve’s interest-rate increases, which it says have resulted in 80% fewer companies going public in 2022 and 2023 compared with 2021. “Home sales are down by about half, largely because the monthly mortgage to purchase a typical California home has gone from $3,500 to $5,400,” the analyst adds. Tech layoffs have also contributed to lower tax payroll withholding this year.
The real culprit for California’s budget shortfall, as ever, is its progressive tax system and how the politicians exploit it. The top 1% of taxpayers in California pay 50% of state income tax, and the top 0.1% pay a third. During the fat years, the state’s 13.3% top income-tax rate throws off enormous revenue that Sacramento proceeds to spend with new commitments that can’t easily be withdrawn when the lean years arrive.
Democrats don’t prepare for droughts because they assume they can always raise taxes on the wealthy when revenues dry up. That will be harder this time because so many of the wealthy have left the state.
Not a Crisis Yet
Don’t worry, it’s not a crisis yet. But it soon will be.
How long will $30 billion in reserves and budget shenanigans last when the deficit is $68 billion?
How long will the top 1 percent be willing to put up with paying 50 percent of the state income tax?
Newsom says the cutbacks will be “temporary”. Tax hikes are not temporary. Expect more of them.
