During his much-ballyhooed, nationally televised debate with Florida Gov. Ron DeSantis last week, California Gov. Gavin Newsom boasts that the state’s economy is “booming” and leads the country.
“California has no peers,” Newsom declared. “California dominates.”
About 18 hours later, the truth reared its ugly head. The Legislative Analyst’s Office revealed that state tax revenues are running tens of billions of dollars behind expectations due to a sluggish economy, creating a major budget headache.
The problem became apparent when the November deadline for filing income tax – seven months later than the original date – passed, and tax receipts for 2022 were finally counted.
“With the recent receipt of various deferred tax payments, the impact of the recent economic weakness and last year’s financial market difficulties on state revenues has become clearer,” the authors of LAO said in a preliminary report on the state of the state fiscal. “Posted payments were weaker than expected.”
LAO analysts Brian Uhler, Chas Alamo and economist Seth Kerstein estimate that revenues in 2022-23 are $26 billion below projections and “our updated revenue outlook anticipates collections coming in at $58 billion below Budget Act projections from 2022-23 to 2024-25.”
California, they say, is starting to see an economic downturn in 2022 as the Federal Reserve System raises interest rates to curb inflation.
“The number of unemployed workers in California has increased by almost 200,000 since the summer of 2022,” they added. “This resulted in a jump in the unemployment rate in the state from 3.8 percent to 4.8 percent. Similarly, inflation-adjusted earnings posted five consecutive quarters of year-over-year declines from the first quarter of 2022 to the first quarter of 2023.
When Newsom and lawmakers finalized a 2023-24 budget in June, they knew revenue estimates were shaky because of the posted filing deadline, but believed they had a a $30-plus billion bridge gap. They now know that the hole is bigger. As Newsom finalizes his proposed 2024-25 budget to be unveiled in January, it must account for the current deficit and one of the same proportion for the next fiscal year.
Automatic spending cuts caused by a sluggish economy, such as a lower mandatory level of K-12 education support, could — on paper at least — cover some of the gap. But they did little to solve the political dilemma Newsom and lawmakers face as they face pressure to maintain school spending and billions of dollars in other commitments made when state coffers seems to be overflowing.
They can tap the state’s reserves, which are now more than $30 billion. That’s what the so-called “rainy day fund” is supposed to do when the income is flat. However, the two-year problem is likely in the $40-50 billion range, which would quickly absorb reserves and still leave a huge problem.
They can do what the state has done in past decades when periodic recessions hurt revenues, especially income taxes: run deficits and cover them with off-the-books loans, such as temporary cuts in school aid or reductions in special funds.
Finally, they can do what the left wing of the Democratic Party has wanted to do for years: raise personal and corporate income tax rates or impose a new tax on personal wealth.
Newsom is the political man in the middle. By word and deed, he wants to concentrate on becoming a major figure in national politics, starting with being an effective replacement for President Joe Biden’s re-election campaign.
“I’m here to tell the truth about the Biden-Harris record,” Newsom declared early in the debate.
Now, however, Newsom faces what could be a budget deficit of historic proportions as the economy he touted as “thriving” falters. How he is projecting his future in politics.