According to new analysis released June 14 from the Legislative Analyst’s Office of California, the state’s general fund balance would decrease $22 billion during the upcoming 2021–2022 fiscal year if the legislature passes its most recently-proposed budget.
Revenues and transfers into the general fund during the 2021–2022 fiscal year are expected to decrease $14 billion, from $187.7 billion in 2020-2021 down to $173.7 billion in 2021–2022.
Meanwhile, expenditures would increase by $30 billion.
Expenses would be $195 billion during the 2021–2022 fiscal year under the legislature’s current budget, up from the $165 billion spent during the current fiscal year ending June 30.
Budget committee leaders—Assemblymember Phil Ting and Sen. Nancy Skinner—released a joint document, detailing the legislature’s version of the new budget. The 13-page document provides a simple outline of how its budget proposal differs from Gov. Gavin Newsom’s most recent budget proposal, released in May. It also highlights the committee’s top legislative priority and the “transformative actions” it are proposing.
Despite the proposed $22 billion withdrawal from the regular reserve, the two Democratic heads of the legislature’s budget committees highlight that total reserves, including all accounts, would end the 2021–2022 budget year with $25.2 billion. They called the sum “higher than any level in history.”
They also highlight that, under current economic assumptions, their plan would allow the sum total of all reserves in all accounts to “increase each year and will total over $35 billion by 2024–2025.”
However, their current economic assumptions include the sorts of tax revenues the state has enjoyed during recent years, including massive inflows of taxes from capital gains, the profit made from the sale of an asset.
This is dangerous because 50 percent of all personal income taxes (PIT) paid in California are paid by only one percent of all taxpayers, whose income is highly volatile with the rise and fall of the stock markets.
According the Legislative Analyst’s Office of California, “PIT payments by the top one percent are driven by rises and falls in stock and other asset prices. The average income for returns of the top one percent was less than $1.3 million in 2009 after asset prices crashed, but had increased to over $1.9 million by 2012. It peaked at over $2.4 million in 2000 at the height of the dot-com boom.”
Because half of all personal income taxes are tied to people whose stated incomes rise and fall with the stock market, California’s budget is also dependent on the rises and falls of the stock market.
California’s savings accounts are meant to be spent in years when they’re needed to offset times when the stock market performs poorly.
In California, taxes on capital gains are calculated at the same rate as current income from wages or from owning a business.
During the pandemic, the respective state budget analysts and economists kept having to revise how much the state should expect from income taxes. When the pandemic began, the stock market dropped and it appeared that taxes on capital gains would be low in the 2020 tax year.
Instead, the stock market rose 16 percent in 2020, state income tax receipts were high, and the state was able to add $22 billion to its General Fund reserve account—the same amount the legislature wants to withdraw during the 2021–2022 budget year.
With these sorts of recent returns, expectations for high tax receipts are reasonable. However, the stock market is notoriously volatile. If the stock market falls and tax receipts disappoint, California might wish it had not spent all the money it was able to save in the General Fund reserves last year.
