With the June budget deadline fast approaching, the state needs to fill a $32 billion deficit. But precisely what is going to be cut remains to be seen.
The hole stands in stark contrast to the healthy revenues that brought budget surpluses the last two years, and it could actually get deeper according to recent estimates from the state’s nonpartisan Legislative Analyst’s Office.
Since January, California went from a $22 billion projected deficit to $32 billion now, said Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute (PRI), in an email response to the Northern California Record.
“Due, in large part, to larger than expected revenue disappointments,” Winegarden said. “Thanks to California's progressive income tax system, tax revenues crash when incomes decline. Incomes for Californians have been declining, causing the unexpected declines in personal (particularly capital gains income) and corporate income tax revenues. These unexpected revenue declines cause the budget hole to continue to grow.”
The LAO’s assessment, including a brief from late May, describes the importance of aligning revenues and spending: “[I]f the Legislature adopts the Governor’s May Revision proposals, the state very likely will face more budget problems over the next few years.”
The budget shifts and needing to rely on reserve funds is troubling, Winegarden said.
“California's lean budget times are rarely one-year events; instead the troubles persist for many years,” Winegarden said. “It is likely that the current budget troubles will follow this trend and persist for several years. If the economy falls into a recession, still a possibility, then the budget difficulties will be even worse next year than they are this year. Therefore, shifting costs into the future just means that next year's budget troubles will be that much more difficult to resolve. The same thing will happen if the reserve funds are depleted at a time when the economy is still growing.”
The LAO also notes that the budget maintains $11 billion in one‑time and temporary spending in 2023‑24.
“Given the current environment, the Administration should be looking for places to cut spending and implement a spending freeze on new programs,” Winegarden said.
And the Administration and LAO remain several billion apart on what California’s deficit actually is.
“Forecasts are always difficult – having said that, given the huge swing in revenues, the LAO's concerns that the Administration may be relying on ‘optimistic assumptions’ regarding revenues should be heeded,” Winegarden said.
The LAO has also discussed the more than $20 billion allocated towards housing and homelessness programs in recent years.
“Certainly, the Administration's inability to sustainably address the crisis earlier necessitates that the budget must continue to allocate resources toward the problem,” Winegarden said. “These expenditures can be thought of as the subsequent ‘costs’ for having failed to address the crisis earlier. In this light, while expenditures are necessary, addressing the homeless crisis continues to divert revenues toward this problem, which necessitates even stricter spending restraint from other programs.”
Winegarden said California’s current budget problems are as predictable as they are devastating.
“The state's progressive tax system leads to unsustainable revenue surges during good times,” Winegarden said. “In response to the plentiful revenues, political leaders commit the state to spending increases that are unaffordable.”
Roughly half of California’s income tax revenue comes from the top 1 percent of earners.
“When the economy turns, revenues crash and a large budget hole ensues. This is not a new phenomenon, and it is way past time for California to learn the lessons of this volatility -- adopt a less volatile tax system and adopt a more responsible approach to spending," Winegarden said.