Since the beginning of the year, the state of California has been dealing with several major issues that more or less impact almost every single resident. The influx of illegal immigrants at the southern border at rates unseen in decades, major insurance companies fleeing the state leading to a large housing insurance crisis, rising house prices, and many businesses closing as a result of the minimum wage hike since last month are some of the problems that cause huge discomfort both among state leaders and Californians. The latest to join this list is the huge budget deficit the state faces as a result of inappropriate spending by the Gov. Gavin Newsom’s administration in recent years.
The issue
Earlier this year, the nonpartisan Legislative Analyst’s Office reported that California is on the verge of facing a budget deficit of more than $70 billion. Gov. Newsom rushed to prove the report wrong, saying in January that the actual gap was $37.9 billion, a number that’s challenging but more manageable given the state’s expected income of over $291 billion. Nonetheless, the risk of such a gap forced state leaders to get their hands on the table and find a solution to lower the deficit to a manageable level.
Early measures
In early April, California state legislators approved a bill to raise taxes on health plans managed by organizations and combine that with various other measures, including spending cuts, postponing programs for future years, and cutting grants. “We are able to meet this challenge thanks to our responsible fiscal stewardship over the past years, including record budget reserves of close to $38 billion,” Newsom then said in a statement. Now, California leadership, led by Gov. Newsom, has a plan to lower the deficit to $27.6 billion. But that comes at a huge cost.
No more tax deductions and cutting jobs
California is grappling with a $27.6 billion budget deficit, as announced by Governor Gavin Newsom on Friday. To tackle this gap, Newsom has proposed eliminating 10,000 vacant state jobs and pausing some popular business tax deductions. These measures are part of his $288 billion state budget proposal for the fiscal year starting on July 1. This budget shortfall is the largest of any state.
“These are programs, propositions that I’ve long advanced — many of them,” Newsom said. “But you’ve got to do it. We have to be responsible. We have to be accountable.”
The lesser damage
While the deficit is smaller than the $38 billion initially projected in January, that’s mainly because $17.3 billion in cuts and adjustments were previously agreed upon by Newsom and lawmakers. Without those measures, the gap would have been closer to $45 billion. This marks the second consecutive year that the state, known for its large population, has faced a significant budget deficit. The state’s revenues continue to fall due to rising inflation and a slump in the tech sector, usually a strong performer. As of the end of April, tax collections from the state’s three main sources—personal income, corporate, and sales taxes—are over $6 billion below earlier estimates.
Governor Gavin Newsom, now in his final term and often viewed as a potential future presidential candidate, is proposing a plan to address both the current year’s budget deficit and an expected $28.4 billion shortfall for next year. His proposal includes more than $32 billion in cuts, aiming to ensure the state legislature can approve a spending plan by June 15.
The planning problem
Budgeting in California is particularly unpredictable because the state’s progressive tax system relies heavily on the wealthy, with roughly half of its income tax revenue coming from just 1% of the population in 2021. This reliance makes the state especially susceptible to fluctuations in the stock market.
If Newsom and legislators misjudge revenue projections and actual state income falls short of their expectations, California faces a budget shortfall. Unlike the federal government, California’s Constitution mandates a balanced budget, leaving no room for running a deficit.
California’s in trouble
“There’s a big problem in this country. California, it’s a disaster for New York as well,” the Witkoff Group chairman and CEO, Steve Witkoff, said to Fox News while giving his observations in regards to California finances. “California’s in trouble. “People are referring to the office buildings where there is a problem, but there’s a problem in the multifamily sector,” he added. “So many of these large funds bought multifamily when rates were 1% and 2%, and they were financing them with positive leverage. And now rates have outstripped those internal returns.”
