California is projected to have a deficit after holding onto a budget surplus for the past several years.
The state is expected to have a $25 billion deficit in the next fiscal year, according to the state legislature’s nonpartisan fiscal experts.
The state’s last budget was $308 billion with a $97 billion surplus, and the year prior to that, the budget was $263 billion with a $76 billion surplus. The state currently has $37.2 billion of reserves.
The office noted that if the state’s reserves aren’t enough to solve the deficit, the legislature will need to cut spending, boost revenues, and possibly move costs around. They also did not say the state is in a recession, but noted the tough economic environment is harming revenues. The office noted that their revenue estimates “represent the weakest performance the state has experienced since the Great Recession.”
“It’s not insignificant, but it’s also manageable,” Legislative Analyst Gabriel Petek said. “We don’t think of this as a budget crisis.”
According to the Tax Policy Center, states collect revenue from taxes, fees and charges, as well as transfers from the federal government.
California has seen a sharp drop-off in business growth in the state, as well as residents, in recent years. People have been leaving California and moving to places such as Virginia, Washington, Florida, and Texas. From April 2020 to January 2022, the state saw over 352,000 people leave, according to the California Department of Finance statistics, per the Los Angeles Times.
A September report from the Hoover Institution found that 352 businesses transitioned their headquarters out of the Golden State between 2018 and 2021. The overall business climate has also declined in the state.
In 2022, just nine businesses with headquarters in California took their company public in the first three quarters. In the same time span in 2021, 81 launched IPOS, per an analysis from Bloomberg News that included some limitations.
As businesses and residents depart the state, the ability to generate revenue from taxes decreases. Revenues have been dropping in California for months, with September being the fourth month in a row that revenues were less than anticipated.
The California Department of Finance has pointed to multiple reasons for low revenue, according to KCRA. California’s tax strategy depends on people who typically earn more than $500,000 per year, but those individuals have been hit hard by inflation. As the Associated Press noted, when people spend less money, there is less need for goods and services, which prompts terminations, resulting in fewer taxes being paid to the government.
Republican Assembly Leader James Gallagher said the Democratic leadership is at fault for the financial situation. He said they “overtaxed Californians and grew government while ignoring investments in critical infrastructure like new water storage.”