CA's Budget Strained for Many Reasons. Can Newsom Turn it Around?

Author’s note: This article is summarized from an MSN article. Attributions are linked within.

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California's fiscal landscape is under significant strain as the state contends with a startling 25% decline in income tax collections during the 2022-23 fiscal year, according to the Legislative Analyst’s Office (LAO). The heavy reliance on income tax revenue leaves the state uniquely vulnerable to the fluctuations of Wall Street and the broader economy.

If current economic conditions persist, the LAO projects a staggering $68 billion budget gap for the coming year. To put this in perspective, even if California were to exhaust its $22.3 billion reserves for "budget stabilization," the state would still face a daunting $46 billion problem.

One major contributor to the income tax decline is California's taxation of higher income earners. While Governor Gavin Newsom proudly supports this progressive approach to revenue generation, it is proving to be an unpredictable and less reliable source compared to other revenue streams.

The LAO report indicates a striking 80% decrease in the number of companies going public in 2022 and 2023 compared to the previous year. This trend not only affects corporate tax revenue but also has wider implications for the overall economic health of the state.

Moreover, the state's economy began to decline in the summer of 2022, resulting in nearly 200,000 Californians losing their jobs. Rising costs, exemplified by a surge in median home mortgage payments from $3,500 to $5,400 in the past two years, coupled with higher interest rates, have led to reduced consumer spending. This drop in consumer activity has further diminished sales tax revenue, exacerbating California's fiscal challenges.

The LAO warns of the uncertainty surrounding these projections, acknowledging that revenues could end up $15 billion higher or lower than forecast for 2023-24 and $30 billion higher or lower for 2024-25. However, the urgency of the situation demands prompt action.

To address this budget crisis, the LAO recommends that Governor Newsom scrutinize the current fiscal year's budget and make efforts to cut discretionary spending. One notable expense, the recent signing of a bill to raise the minimum wage for healthcare workers to $25 an hour over time, is expected to add $4 billion in costs to next year's state budget.

As the state faces these financial challenges, caution is advised against additional borrowing, given that it comes with substantial annual debt repayments. The LAO also highlights the need for a thorough review of state spending to identify and address areas where cuts can be made, emphasizing that proactive measures now can mitigate the inevitable pain facing Sacramento and the state of California.