With a new report from the Legislative Analyst's Office (LAO) showing that California could face a deficit in the next year, and the state’s progressive tax system, it’s raising questions about what resources would be available for closing potential holes in the state budget.
A one-year deficit won’t impact it very much for a very specific reason, Kevin Klowden, Milken Institute’s Chief Global Strategist, told the Northern California Record.
“Because one of the things that was put in place under Gov. Jerry Brown is a Rainy Day Fund, specifically because of the recognition that California’s budget cycle was incredibly cyclical,” Klowden said. “In particular, California's revenues are incredibly dependent on the top 1 percent of income earners, or even the top one-half of 1 percent, which is a real issue.”
And that becomes much more significant when revenue and wages go up and down very heavily, Klowden said, not just in terms of the tech sector and that impact, but more broadly with the economy.
“But the tech sector in particular did incredibly well during the pandemic, which is one of the reasons the state was running major surpluses,” Klowden said. “And the state put in a number of programs – particularly based on those revenues – especially in the short term. So it creates structural issues if there is a downturn like this, and Gavin Newsom had continued some of the same policies that Jerry Brown did, where he refused to spend all of the state surplus, which means that closing the budget deficit like this for one year – especially if it doesn't grow more than projected – will be fine.”
But the issue becomes what happens should the deficits continue. In its Nov. 16 fiscal analysis, the LAO states that California faces a $24 billion budget problem and ongoing deficits.
“Reflecting the threat of a recession, our revenue estimates represent the weakest performance the state has experienced since the Great Recession,” the report states.
With California’s reliance on top income earners for much of its revenue, it can be difficult to attract and retain some of them, Klowden said.
“One of the reasons that companies and wealthy individual owners move headquarters out of California is because they don’t want to be hit by the heavy taxes,” Klowden said. “It’s not a surprise if you think about it why Elon Musk moved the corporate headquarters of Tesla to Texas, a state that’s not actually particularly friendly to electric vehicles.”
“And you’ve seen a number of companies that have done this and that creates an impact, and it’s one of the reasons why, I would argue, that Gov. Newsom opposed the most recent electric vehicle tax, Proposition 30, which was going to add on to the taxes of the wealthiest and destabilize things even further.”
The Proposition 30 ballot measure, which proposed taxing wealthy individuals to pay for electric vehicle subsidies, was rejected by voters 58% to 42% in the Nov. 8 election.