SACRAMENTO, Calif. — California is facing a record $68 billion budget deficit, state officials announced Thursday, a consequence of a cooling economy and delayed tax filings because of last winter's damaging storms.
Californians didn't have to pay their 2022 taxes until November this year, meaning Democratic Gov. Gavin Newsom and his legislative allies had to come up with a budget over the summer without knowing how much money the state had to spend.
It turns out, they badly misjudged how much taxes people and businesses would pay. The nonpartisan Legislative Analyst Office said tax collections were off by $26 billion, a major driver of the deficit. When combined with the economic slowdown California has been facing since last year, it leads to a predicted deficit of $68 billion.
That's the biggest deficit by dollars in state history. Previous deficits have been larger as a percentage of total state spending. California's current budget tops $300 billion, the largest by far of any state.
Newsom will offer his budget proposal in January, giving the first look at how much he wants to spend and how he plans to address the deficit, and his own finance department may project different numbers. He'll then negotiate with lawmakers through June. The state's next budget will take effect July 1.
Facing a deficit puts Newsom in an unwelcome political spot in his final term as he works to build his national profile.
California's problems are partly due to inflation and how the U.S. government is trying to control it. The Federal Reserve has been increasing a key interest rate that makes it more expensive for people and businesses to borrow money. That means fewer people are buying homes and fewer businesses are hiring workers, leading to less tax revenue coming into the state.
“When this year’s budget was passed in June, the Administration cautioned that California still faced a revenue downturn driven by a declining stock market, high interest rates, and increased inflation in 2022. The full scope of that revenue decline has only been revealed late this fall after this year’s unprecedented delay in tax receipts,” H.D. Palmer, a spokesman for Newsom’s Department of Finance, said in a statement.
In California, the number of unemployed workers has risen by nearly 200,000 since last year, enough to increase the state’s unemployment rate to 4.8% from 3.8%. The national unemployment rate is 3.9%.
Layoffs have hit the tech sector particularly hard. The industry has an outsized impact on California given its concentration in Silicon Valley. IT has been the backbone of the state’s economic growth and revenue, said Sung Won Sohn, an economics professor at Loyola Marymount University.
“They expanded greatly during the pandemic and now they are finding that they have too many people and they need to cut back expenses,” Sohn said.
Home sales in California have been cut in half compared to two years ago as average monthly mortgage payments have jumped to more than $5,500 from $3,700, according to Oscar Wei, deputy chief economist for the California Association of Realtors.
Wei said he expects interest rates to fall slightly in 2024 to around 6.5% — still well above the 3% rates seen during the pandemic.
“We’re still going to have higher mortgage payments for many of the homebuyers,” he said.
California revenues soared to record highs during the pandemic on the back of a strong stock market. The state had budget surpluses in excess of $100 billion, allowing Democratic leaders to greatly expand government services — including guaranteeing free lunch for all public school students and offering government-funded health insurance to all eligible adults regardless of their immigration status.
That revenue growth stopped last year as the state had a $32 billion budget deficit. Newsom and the Democrats who control the state Legislature covered that shortfall through a combination of delaying some spending, cutting some spending and borrowing.
Still, Newsom and legislative Democrats continued to expand government. In October, Newsom signed a law to gradually raise the minimum wage for health care workers to $25 per hour. That law will cost the state about $2 billion this year in increased labor costs and Medicaid payments to hospitals.
A full statement from the governor's office is available below.
"The Governor has maintained strict fiscal responsibility since taking office, building up the state’s reserves to historic levels (the maximum allowed by the state constitution to be put in reserves) and paying down debts – putting California in a strong position to deal with budget shortfalls.
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.
In January, the Governor will introduce a balanced budget proposal that addresses our challenges, protects vital services and public safety, and brings increased focus on how the state’s investments are being implemented, while ensuring accountability and judicious use of taxpayer money."
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