Tax collections for 2022 in California fell well short of expectations, contributing to a $26 billion budget deficit for fiscal year 2023–2024, which is expected to increase to $58 billion through 2025, according to the state’s nonpartisan Legislative Analyst’s Office.
A “severe revenue decline” of 25 percent from the prior year, the decrease in tax collections is second only to the nearly 29 percent drop in 2002 following the dot-com bust, according to state tax collection data.
Some lawmakers were quick to point out the abrupt change of fate for the Golden State’s finances, shifting to deficit from surplus in one calendar year, and noted the need to identify potential funding cuts to balance the budget.
“A sharp but entirely predictable turnaround from surpluses Governor Newsom bragged about just last year,” the state’s Senate Republican caucus wrote in a Dec. 1 statement.
The group noted the shortfall—which they said could swell or decrease by more than 50 percent—could lead to a significant reduction in education funding and other programs, and as such is an “economic reality” that would bring “Democrats’ overspending and overpromising back down to earth.”
Usually due in April, tax payments were postponed until October this year because of winter storms that affected the state.
Such complicated budget discussions, as revenues were forecast using the previous year’s data, and state analysts repeatedly warned that numbers could change once tax filings were received.
Citing rising interest rates as contributing to the drop in tax revenues, the report by analysts blamed the Federal Reserve’s fiscal policy for much of the economic weakness.
“In an effort to cool an overheated U.S. economy, the Federal Reserve has taken actions over the last two years to make borrowing more expensive and reduce money available for investment,” the authors wrote. “This has slowed economic activity in a number of ways.”
Analysts noted an increase in average monthly mortgage payments for those purchasing a home in the state—spiking to $5,400 from $3,500 because of higher borrowing costs—as responsible for reducing the number of homes sold over the last year by about half, as fewer families can afford to buy.
Further contributing to the decline in tax collections is an 80 percent drop in new California businesses going public, meaning offering stock, between 2021 and 2023, according to the report.
“As a result, California businesses have had much less funding available to expand operations or hire new workers,” analysts wrote.
Such is contributing to a weakening job market, as unemployment grew by about 1 point to 4.8 percent, with 200,000 more Californians unemployed now than in the summer of 2022, according to the report.
While inflation is driving the price of goods higher, sales tax revenues failed to increase, with experts pointing to less household purchasing power, as incomes have declined compared to January 2022 when adjusted for inflation.
The combination of forces impacting the economy is creating uncertainty for those seeking to manage the state’s finances, and some experts expect budget problems to persist.
“These mounting economic headwinds have pushed the state’s economy into a downturn,” analysts wrote. “There is a significant risk. The current weakness could continue into next year.”
Some lawmakers said the problems facing the state are self-inflicted and could have been avoided with more cautious budget negotiations, highlighting a $116 billion increase in spending over the last six years.
“Despite all warnings that it was unsustainable, the majority party has increased state spending ... nearly doubling the general fund budget,” Sen. Roger Niello (R-Fair Oaks) said in a Dec. 1 statement. “Republicans have cautioned that this level of spending will lead to greater deficits, and it would be more prudent to reduce the level of spending.”
Lamenting the one-party rule that dominates the state’s Legislature—with significant Democratic supermajorities in both chambers—the GOP senator said he is hopeful lawmakers will recognize the significance of the budget dilemma and work together to find solutions.
“California’s tax-and-spend majority has joined this governor in budget decisions that are based on unrealistic revenue estimates and budgeting gimmicks,” Mr. Niello said. “Hopefully, the majority will see it is time for a more realistic budget strategy, instead of throwing money at a laundry list of projects that sounds nice on the national television debate stage.”
