California may face a more significant budget shortfall than previously estimated by Governor Gavin Newsom, raising concerns about the state's economic future.
Newsom had announced a projected budget deficit of $22.5 billion for the upcoming fiscal year, a substantial decline from the previous year's surplus of about $100 billion, resulting from federal COVID relief and rising capital gains. The California Legislative Analyst's Office (LAO) recently published a report estimating that Newsom's forecast fell short by about $7 billion, primarily due to $10 billion less in tax revenues than anticipated, thereby indicating a potentially more substantial budget problem.
The LAO, which examines the budget for the state legislature, reveals that there is a two-in-three chance that state revenues will be less than Newsom's budget estimates for 2022-23 and 2023-24. Gabe Patek, the legislature's budget analyst, wrote in the report that the best estimate is that revenues for these two years will be approximately $10 billion lower, which implies a larger budget issue by about $7 billion, using current revenue collections and economic data.
California's monthly tax revenue was approximately $14 billion lower in January than it was during the same month last year. Furthermore, tax revenue for the current fiscal year, which began in July, is approximately $23 billion lower than the previous year, according to the Wall Street Journal, despite California already having the highest top-income tax rate of any state at 13.3%. The top 0.5% of taxpayers pay 40% of California's state income tax, recent statistics show.
H.D. Palmer of the California Department of Finance recently disclosed in an interview with California Public Radio that in 2020, 1% of the total number of income tax returns filed accounted for over 49% of all personal income tax paid in that year. Capital gains are another tax aspect that is affected by volatile equity prices among Silicon Valley tech firms as they lay off workers and cut bonuses due to fears of a potential recession. Another issue that could harm tax revenue is the migration of California residents to other states, notably affluent Californians who pay higher taxes.
Despite the declining tax revenue, the LAO reports that revenues are still higher than their historical averages. Patek explains that even after inflation adjustments, the anticipated revenue for 2023-24 remains approximately 20% higher than before the pandemic. However, Patek adds that "spending remains above historically recent peaks" and suggests that it is unlikely for the tax revenue to be sufficient in the next few years to afford California's projected spending levels.
Newsom is expected to issue a revised budget in May, which is expected to differ significantly from the previous year's version, which predicted a $97.5 billion surplus. Newsom's office has yet to respond to Fox News Digital's request for comment.
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