Facing a record budget deficit of $68 billion in terms of shear size, 56-year-old California Gov. Gavin Newsom has no answer for how to reverse a sizable loss in tax revenue, hoping deferred post-pandemic revenue to come in soon. California’s Legislative Analyst [LAO] report says since June the budget deficit has grown $54 billion, up from $14.3 billion. LAO office won’t know the extent of the juggling that Newsom will be forced to make until delayed tax revenue are computed by year’s end. Newsom received 15.3 billion from the 2020 CARES Act, something he can’t expect this time around. Concerns about a 343 million loss in California’s population in 2022, potentially more in 2023, forecasts diminished tax revenues into the foreseeable future. If Wall Street continues to rally, the state treasure should make up capital gains and income tax for the loss in population.
Before the LAO is forced to start hitting the budget with a meat cleaver, Newsom has other buckets of cash, including a $24 billion rainy-day fund. IRS data indicates that California lost $29 billion in tax revenue from 2021, after losing $18 billion in 2020. When you consider the loss of population, it presents cash-flow problems for the state going forward. Slashing spending on K-12 public schools, community colleges, California State Colleges and University of California would have disastrous consequences, trying to hike tuition already failing to keep pace with operating expenses, including professional and support salaries. Newsom’s plans to spend additional billions on homelessness are now up in the air, watching the State budget bleed red ink. When compared to the U.S. government, California’s budget problems look even worse, though smaller in numbers.
Unlike the federal government, California doesn’t have its own Treasury to print money, or borrow it technically from the Federal Reserve Board, so a loss of revenue could have dire consequences for public schools, state funded colleges and of course anything left over that goes to homelessness or other priority programs. Newsom certainly can’t keep raising gas taxes, already leaving many residents cash-strapped, unable to meet monthly expenses. California’s Democrat-controlled legislature finds many spending priorities, not prone toward austerity measures needed in times of reduced tax revenue. California’s cash reserves aren’t enough to cover the red ink now threatening to cut back on vital state services. LAO said to balance the budget it will require the legislature to increase revenue to scale back current spending levels. Most Democrat lawmakers don’t like slashing vital programs.
Bigger picture problem facing California involves the cost of rent and real estate in its big cities where some 85% of the population lives. Young couples faced with limited resources find the state unaffordable in terms of raising families or standard of living. Newsom or the state legislature have no control over the cost of living, other than keeping inflation under control or maintaining a hospitable business atmosphere. California’s high personal and corporate tax rates have driven many business and families from the state. Moving to any part of the Mountain West, Midwest, North East, Mid-Atlantic or South makes sense to young families unable to afford rent or real estate in California’s big cities. However the national inflation rate affects the cost of living in California, also impacts monthly expenses but isn’t something likely to make thing more affordable for young families.
Debating Florida Gov. Ron DeSantis on Fox News Nov. 30, Newsom defended California’s budget problems, pointing fingers at Florida’s problems with public schools and health care. Newsom sidestepped the issue of California losing record numbers of residents, something DeSantis blamed on homelessness and urban decay. By far the biggest reason for the exodus out of the state involves the cost of living, something far cheaper in other states. Newsom wouldn’t concede any point to DeSantis about Florida being a preferred destination for young people and retirees. Newsom has hit a brick wall in terms of raising taxes already at the breaking point for many California residents. So when it comes to balancing a budget, he’s going to have to cut spending or face a potential credit downgrade. Moody’s rating service gets nervous looking at a $68 billion deficit.
If revenue shortfalls continue, Newsom has some tough choices before the states’s $68 billion deficit gets any worse. If the U.S. economy slides into slowdown or recession in 2024, Newsom can expect even less tax revenue to deal with the current deficit, threatening many of Newsom’s high-priority spending programs. Wall Street still hasn’t decided whether the country’s heading into a slowdown or recession, or, with today’s 3.7% unemployment rate and 199,000 jobs, the economy nationally or in California heads for more tax revenue. “Federal delays in tax collection forced California to pass a budget based on projections instead of actual tax receipts. Now that we have a clearer picture of the state’s finances, we must now solve what would have been last year’s problem in this year’s budget,” said Erin Mellon, Newsom’s communication director.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.
