As more economic indicators suggest the U.S. economy faces a recession, questions persist about how California addresses a possible budget deficit with less tax revenue.
It comes down to how California prioritizes its spending, and whether it is used for one-time projects, unfunded liabilities, or ongoing programs, Kevin Klowden, Milken Institute’s Chief Global Strategist, told the Northern California Record.
Currently, California has allocated monies for transitional kindergarten among other new programs.
“It’s not a big deal if it’s a one-term expenditure; the issue is when they become multiple-year expenditures,” Klowden said.
The current tech sector slide also means less corporate tax and less income tax in the general fund. A recent Tax Foundation report comparing the 50 states shows that California ranks near the bottom in terms of corporate, sales, and income tax burden.
The current tech sector downturn wasn’t necessarily anticipated and probably should have been, Klowden said. “Because you’re dealing with a boom situation that resulted in massive investment in IT.”
But in California, Klowden added, the biggest issues aren’t necessarily the taxes.
“It’s actually the cost of everything else,” Klowden said. “The real estate, utilities, overhead, various other burdens. Notoriously, California has struggled with the issue of workers’ compensation insurance; it all adds up, but really, it’s that regulatory side, and when you talk to businesses and individuals who choose to flee, that becomes more significant.”
Klowden noted that the United Kingdom – the world’s sixth largest economy – recently had to introduce tax increases and spending cuts to create a balanced budget.
That’s not the case in California. “It’s a very important contrast,” Klowden said.
“That's not a problem right now. That's not an issue – nobody is screaming and saying the state can't meet its obligations,” Klowden said. “But if this continues, then they’re going to have to do cuts.”
How Gov. Gavin Newsom and state lawmakers address new expenditures in the leadup to the next election is still developing. Among potential new measures, a reparations task force – signed into law by Newsom in 2020 – is scheduled to present its report to the Legislature in 2023. The panel’s next meeting is set for this week in Oakland, Calmatters reported.