SACRAMENTO, California – California Governor Gavin Newsom will update his budget proposal on Friday, and the news likely won’t be good.
Newsom, in his final term as governor and widely seen as a future presidential candidate, announced a deficit of nearly $38 billion in January, driven by declining revenues. Days later, the nonpartisan Legislative Analyst’s Office said the deficit was actually $58 billion, including some reductions in public education spending.
State authorities needed a major recovery in tax collection to improve the situation, but this did not happen. By the end of April, state tax collections from its three largest sources – personal income, businesses and sales – fell more than $6 billion below the previous estimate.
That means the deficit has likely grown and Newsom will have to come up with more ways to fix it. This is the second year in a row that California has recorded a deficit, and so far the state has avoided the most painful cuts to key ongoing programs and services. Instead, Newsom and lawmakers have reduced one-time spending, delayed other spending and borrowed from other bills.
A larger deficit could force more difficult choices. In January, Newsom suggested the possibility of delaying a minimum wage increase for health care workers that Newsom signed into law with much fanfare last year.
“We still have a deficit. We will manage it, and we will manage it, without across-the-board tax increases,” Newsom said Wednesday during an event hosted by the California Chamber of Commerce. “We are not going to try to solve it just for this year. I want to resolve it for next year. I think it’s very important. We have to be more disciplined.”
State budgeting is a guessing game, especially in California, where a progressive tax system means the state gets most of its tax revenue from rich people. About half of the state’s income tax collection came from just 1% of the population in 2021. This makes the state more vulnerable to stock market swings.
If lawmakers and Newsom get the revenue projections wrong and the state receives less than they thought, there will be a deficit. And unlike the federal government, the California Constitution requires the state to have a balanced budget.
Last year, its predictions were wrong after a series of destructive storms in January 2023 caused long delays in tax filing deadlines. Instead of filing taxes in April, most Californians could wait until November. Lawmakers still had to approve a budget by June, despite not knowing how much money they had.
In January of this year, Newsom said state revenues for 2022-23 to 2024-25 were $42.9 billion lower than estimated.
Newsom and lawmakers have already agreed on about $17 billion in reductions and deferrals to reduce the deficit. Additionally, Newsom said he wants to withdraw $13 billion from the state’s various savings accounts to help balance the budget.
But these measures will not close the gap and California appears headed for more deficits in the future.
Corporate tax collections fell 15% from last year, the fourth-largest drop in the last 40 years, according to the LAO. And although income taxes are rising thanks to a 20% rise in the stock market since October, which is driving an 8% increase in total income tax collections this year, the LAO said it is unlikely may growth continue. This is because the state’s economy in general has not improved – the unemployment rate has increased and investment in California businesses has decreased.
After Newsom unveils his proposal on Friday, state lawmakers will have until June 15 to pass a balanced budget. The new fiscal year begins on July 1st.
