When I came to California in 1987 to write about state politics, one of the pleasant surprises was the Legislative Analyst’s Office. I like using data in my articles. And they provide analyses that truly live up to their “nonpartisan” label. That has happened even as the state has shifted away from a two-party system as the Democrats have achieved supermajority status in both houses of the Legislature, meaning more than two-thirds of votes.
I have disagreed with them whenever they have called for tax increases to solve “budget problems,” Sacramento parlance for deficits, because Californians already are taxed way too much. But it’s always good to work with objective numbers.
Their chart follows. It includes both the LAO’s forecasts, in blue, and projections of the governor’s Finance Department, in brown.
The report notes: “The main reason that our estimates of the state’s operating deficits are slightly smaller than the administration’s is that our estimate of General Fund spending is lower than the administration’s estimates. Specifically, our estimates of spending (excluding spending on schools and community colleges) are about $5 billion lower in 2025-26, $4 billion lower in 2026-27, and $3 billion lower in 2027-28. These differences are almost entirely driven by our lower spending estimates for Health and Human Services (HHS) programs.”
The main points are: The forecasts are pretty close. And last year’s forecasts actually were too high under both the LAO and the Department of Finance. Below is my chart comparing last year’s LAO projections to this year’s.
Hedging Projections
A projection is just a bunch of numbers dependent on future events. The LAO’s outlook sensibly takes into account budget cuts since the governor’s May Revision was released on May 14, and notes, “While the budget is undeniably on better fiscal footing under the May Revision, there are some key fiscal risks to the budget’s out-year condition. Specifically, our forecast assumes the implementation of all of the Governor’s May Revision proposals. Although our forecast includes our best estimates of the Governor’s proposals, due to the nature of forecasting our assessment of the proposals also is subject to some uncertainty.”Then there are the voters in the Nov. 5 election. The LAO explains, “The state’s fiscal condition also faces other uncertainties. This includes, for example, tax proposals that have interactions with measures potentially appearing on the November ballot. These proposals specifically could present downside pressure on the budget picture.”
- $18 Minimum Wage Initiative. This would kill jobs and reduce state revenues.
- Employee Civil Action Law and PAGA Repeal Initiative. It could reduce lawsuits against businesses, thereby increasing their revenues, producing more taxable income.
- Oil and Gas Well Regulations Referendum. This would repeal Senate Bill 1137, which prohibits new oil and gas wells within health protection zones. Doing so would increase tax revenues from the wells.
- Pandemic Early Detection and Prevention Institute Initiative. It would increase the income tax by 0.75 percent for 10 years and create the California Pandemic Early Detection and Prevention Institute. The top income tax rate would rise from 14.4 percent to 15.15 percent, by far the highest in the nation. More rich taxpayers would flee.
- Two-Thirds Legislative Vote and Voter Approval for New or Increased Taxes Initiative. This would finally give taxpayers a break. It’s challenged in court by Gov. Gavin Newsom and legislative leaders. But hearings before the California Supreme Court show the justices appear to be allowing the voters to decide.
Federal Policy
Then there’s the federal government. State politicians love to boast, “California is the fifth largest economy in the world,” as Attorney General Rob Bonta just did on May 26. But it’s really just a subsection of the giant U.S. economy. Meaning it’s directly affected by federal tax rates, trade policies, regulations, inflation, and especially, Federal Reserve interest-rate policy.Then of course there’s the Nov. 5 election in which U.S. voters will choose between two different fiscal futures under either President Joe Biden or former President Donald Trump.
That means all the projections by the LAO and the Finance Department depend on factors beyond the state’s control, although influenced by California members of the U.S. Senate and House of Representatives.
The problem remains what it has been for decades: California both spends too much and depends too much on the income taxes paid by millionaires and billionaires, especially those in Silicon Valley. The nearly $100 billion surplus of two years ago was a Golden State opportunity to transition to a more sensible taxation system, such as a flat tax. Doing so would have evened out the revenue rollercoaster, while encouraging more investment to create the high-paying jobs needed just to survive in this expensive state. But the chance was lost.
What it comes down to is crafting this year’s budget numbers once again is like throwing darts at a shifting dartboard.
