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The dome of the California state Capitol in Sacramento, Calif., Thursday, Nov. 17.
Photo:
Rich Pedroncelli/Associated Press
Democrats in Sacramento last month sent $10 billion in direct payments to voters. Please don’t call them bribes. But with the election past, the state Legislative Analyst’s Office (LAO) last week broke the bad news that the state government now faces a $25 billion shortfall next year—assuming there isn’t a recession.
California’s steeply progressive income tax makes it heavily dependent on the income, and especially the capital gains, of high earners. The top 0.5% of taxpayers pay 40% of state income tax. Tax revenue surged in the pandemic as the Federal Reserve’s loose monetary policies inflated asset values. Many tech workers cashed out stock options.
Surging capital gains and a gusher of federal pandemic relief contributed to a $97 billion budget surplus in this fiscal year and $76 billion a year earlier. As usual, Democrats spent like this would never end. But stock values, especially of high-flying tech companies, have crashed since the Fed began tightening more aggressively this year. Silicon Valley companies are laying off workers.
So little surprise, the state budget analyst now forecasts a $25 billion hole in the next fiscal year, which it says “understates the actual budget problem in inflation-adjusted terms” because it didn’t adjust many spending programs for inflation. “Assuming the Legislature wanted to maintain its current level of services, additional spending would be necessary,” the LAO says.
That’s a more than fair assumption. Government unions and liberal interest groups scream about budget “cuts” whenever spending doesn’t grow as fast as inflation. The LAO also assumes that “the Legislature enacts no new policies over the period.” What are the chances of that with Gov.
Gavin Newsom
preparing to run for President in 2024?
Oh, and another caveat: The LAO forecast doesn’t account for a potential U.S. recession, in which case “revenues could be $30 billion to $50 billion below our revenue outlook in the budget window,” the analyst warns. That means the state could be staring at a $75 billion budget deficit next year.
Progressive demands will then mount to raise taxes again on high earners, as Democrats did in 2012. The Democrats who run Sacramento enjoy the revenue highs but always need another fix. The lesson for other states is not to get hooked in the first place.
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