Amidst a sharp decline in tax revenues reminiscent of the Great Recession and the dot-com bust, California is bracing for a projected $68 billion budget deficit next year, a challenge necessitating spending cuts and the utilization of reserve funds, according to state finance officials. This revised estimate from the nonpartisan Legislative Analyst’s Office, released as Governor Gavin Newsom finalizes his January budget proposal, is a consequence of a considerably delayed fall tax-filing period that yielded collections well below legislative expectations set during the adoption of the summer spending plan.
This anticipated deficit would mark a record for California, albeit officials emphasize that it is partially attributed to the substantial growth of the budget in recent years, exceeding $300 billion in the most recent iteration. Despite the magnitude of this challenge, officials underscore the state’s historical ability to overcome similar or more severe spending gaps, relative to the budget’s size.
Legislative analyst Gabriel Petek noted that California is in a comparatively better position to address the situation than during the economic recession 15 years ago, having established multibillion-dollar rainy-day funds. However, he acknowledged a looming structural deficit of approximately $30 billion annually.
Characterizing the situation as a “serious budget problem” rather than a crisis, Petek highlighted the state’s resilience but cautioned about the gravity of the issue. H.D. Palmer, a spokesperson for Newsom’s Department of Finance, indicated that the governor would present updated figures in the upcoming spending plan, acknowledging the substantial deficit as a significant challenge.
Attributing the fiscal predicament to a novel tax-filing timeline prompted by severe winter storms and subsequent IRS delays, officials pointed to a $30 billion deficit already factored into the budget after two years of record surpluses. However, collections fell an additional $26 billion below estimates, constituting a 25% drop from the previous year.
This year continues to present challenges, with inflation impacting the housing market, a stock market downturn affecting capital gains, and reduced investments in the tech industry. Overall, tax revenues are projected to fall short by $58 billion in the multi-year budget window.
While the Legislative Analyst’s Office anticipates a resurgence in tax revenues next year, it emphasizes a slow recovery, leading to long-term funding shortfalls that could impact essential programs. Proposing options to address the immediate problem, Petek suggested declaring a fiscal emergency, tapping into rainy-day funds, and reconsidering one-time spending allocations to save potentially $10 billion or more.
The report also recommended recalculating the constitutionally-mandated funding obligation to schools and community colleges, Proposition 98, based on lower revenues, potentially reducing the deficit by nearly $17 billion over three years. However, this proposal may face resistance in the Legislature, with lawmakers under pressure to protect classroom funding and address competing priorities from advocates.
As California’s leaders prepare to grapple with this fiscal challenge, responses have varied, with Republicans urging a more realistic budget strategy and Democrats facing pressure to safeguard essential programs and priorities. The upcoming months are expected to be marked by intense deliberations and negotiations as the state confronts the significant budget deficit.
