By Matt Patton, CATA Executive Director
Since the end of the legislative session on August 31, Governor Newsom has vetoed at least 18 bills, citing looming fiscal concerns. Veto messages from the Governor all contain a similar explanation: “With our state facing lower-than-expected revenues over the first few months of this fiscal year, it is important to remain disciplined.” (Newsom, 2022).
Income tax revenue has been coming in at 11% below projected levels since the beginning of the year (Christopher, 2022). Lower than anticipated tax revenues are calculated at $4.4 billion thus far. Lost income tax and capital gains revenues are to blame for the shortfall.
Newsom has communicated that bills totaling $30 billion in one-time and ongoing funding have landed on his desk. The additional $30 billion was not part of the budget that was approved in June. The bills included program costs that were not budgeted (Nixon, 2022).
California’s tax system relies on high-income earners, with the top 1% of California taxpayers contributing 49% of income tax in the state. Capital gain taxes on stock, homes and other investments contributed to the state’s surplus income in recent years. Many of California’s top earners did well during the pandemic, which increased state revenue. However, those earnings are starting to slow (Nixon, 2022).
The California Department of Finance warned in May that surplus budgets, which Californians have experienced over the last few years, would not last forever. The war in Ukraine, inflation, continued supply chain challenges, increased interest rates by the feds, and a decreasing stock market will reduce revenue to the state (Nixon, 2022).
During the surplus budgets of the last two years, plans were made for leaner days. Currently, California has $37 billion in reserve accounts and $23 billion in the Rainy Day Fund (Holden, 2022).
Nothing is inevitable, but numerous indicators forecast a change in California’s overabundance of tax revenue. California’s Reserves are robust. However, current revenue below projected levels will result at minimum in the status quo and at maximum fiscal reductions in programs.