United States – The updated version of California Gov. Gavin Newsom’s budget will be unveiled on Friday, and the results are likely to be grim.
Newson, serving his last term as California governor and often hailed as a future presidential candidate, announced a shortfall of around USD 38 billion. This was caused by reduced revenues. The statement was made five days after the Nonpartisan Legislative Analyst’s Office, saying that it was actually USD 58 billion when you include the reduction in spending on public education, as reported by Assocated Press.
Revenue Challenges and Economic Uncertainty
The state government hoped for a bigger comeback in tax collection that would have lifted things, but that doesn’t seem to be the case. By the April’s end, State tax collections resulting from these three biggest sources – namely personal income, corporations and sales – fell more than USD 6 billion short of the earlier projection.
For Newson, that would mean that the real deficit has gotten bigger, so he will have to come up with more solutions. This year marks the second consecutive deficit in California’s budget, but so far, the government has avoided the most painful cuts into major running programs and activities. Conversely, Newsom is cutting one-time expenses, pushing away the other spending with further borrowing from the other accounts.
However, it could be that a large deficit would be accompanied by the toughest decisions. Like a charm, in January, Newsom proposed postponing a minimum wage increase imposed on healthcare workers that Newsom triumphantly signed last year.
“We still have a shortfall. We will manage it, and we’ll manage it, yes, without general tax increases,” Newsom said on Wednesday during an event held by the California Chamber of Commerce. We’re not just going to try to solve it for this year. I want to solve it for next year. I think it’s too important. We have got to be more disciplined.”
State budgeting serves as a guessing game, notably in California where a progressive tax system is in place forming the top part of the income distribution. In 2021, 50% of the state’s income tax collection was yielded by 1 percent of the population. Thus, the state can be easily whipsawed by the stock market.
When the state revenue projections are wrong, and less money is received, a revenue shortfall is created. Unlike the federal government, the California Constitution imposes a strict balanced budget requirement.
In 2023, we had a series of January storms, which resulted in significant damages and filing extensions. On top of that, their predictions were way off. Rather than submitting their taxes in April, most Californians would file their taxes in November this way. But lawmakers were still bound to pass a budget by June, not knowing the amount of money.
Fiscal Discipline and Tough Choices
In the current fiscal year, the state budget for 2022-23 to 2024-25 has increased by USD 42.9 billion data points against their initial projections.
Newsom has succeeded with over USD 17 billion in recovery cuts and deferrals to help reduce the deficit. In the same breath, Newsom has promised to tap into USD 13 billion from the states’ different savings accounts to help balance the budget.
Nevertheless, they are not enough, and the opposite looks like California is on the way to more deficits in the coming years.
Corporate tax receipts declined another 15% from the previous year’s collection, which is the largest in the past 40 years, as per the LAO projections. However, the same report indicated that income tax grew by 20% because of the hike in the stock market index since October, which amounts to an 8% increase in total income tax collections this year, though the possibility of sustained economic growth has been questioned. Because of this, the general condition of the state economy has not improved even though the workers’ unemployment rate has increased, and investments in California companies have declined, as reported by Associated Press.
Legislative Deadline
On Friday, when Governor Newsom presents his plan, lawmakers would only have till June 15 to pass intact budget. Fiscal year, which ends in June, will be completed by the start of the new fiscal year on July 1.
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