California budget balloons to record $306 billion

Governor Gavin Newsom announced Friday that the state’s budget deficit has ballooned by $9 billion, going from the initial January estimate of $22.5 billon to $31.5 billion, leading to more major cuts being implemented next fiscal year.

In total, the state budget is now looking to be around $306 billion, up from an estimated $297 billion in January. While Gavin Newsom proposed many major cuts at the beginning of the year, multiple factors quickly made the situation worse and called for more. Initially, big cuts had been planned for state flood prevention programs, as the state was in a major drought and those funds would not be needed. However, record rain and snowfall throughout the state in the first three months of 2023 quickly quashed those plans, with more money actually being poured into those programs because of the resulting floods and poor winter conditions.

The storms also dealt the state a major funding delay, as the state allowed most residents to pay taxes later in the year from due to problems associated with the storms and subsequent flooding. While this will help the 2024-2025 fiscal year, it also means that  billions less would be going into the state this coming year, as the deadline is now in October rather than the usual April.

As around half of California’s income comes from the top 1% of earners as well as major businesses in the state. Higher federal inflation rates, a chaotic stock market, and many wealthier Californians leaving the state also came together and added to the increased deficit.

With an even larger deficit looming, Newsom announced plans for major cuts to the budget on Friday, in addition to moving around expenses, using emergency funds, and increasing the amount borrowed. While not specifically mentioned by Newsom on Friday, recent decisions, such as not supporting cash payments in possible reparations and rolling back on previous state commitments on environmental funding, are likely tied to Newsom’s increased frugality because of the increased deficit.

“We are walking into a budget where we need to maintain our prudence,” Newsom said on Friday. “We have a $31.5 billion challenge, which is well within the margin of expectation and well within our capacity to address.”

For the last few years, California coming back from the COVID-19 pandemic brought in tens of billions of “surplus cash,” including one year seeing a record $97.5 billion. However, much of this was spent on stimulus funding for residents and other one-time spending projects, including major homeless initiatives. Now stuck with an even larger deficit than originally planned, Newsom also showed where major cuts would likely be happening.

Most surprising was his reversal on climate and energy projects, with Newsom, saying that $6 billion will be cut in the coming year. If approved by the Legislature, it would amount to a 11% cut in climate-related programs. This would include a $1.1 billion cut to electric vehicle transitioning programs. Environmental groups quickly went after Newsom on Friday, seeing these cuts as something of a betrayal.

Major cuts, funding halts on the horizon

“While we’re grateful to Governor Newsom for avoiding further cuts to climate and clean energy investments, California has major challenges ahead,” said Nicole Rivera, Government Affairs Director for The Climate Center, in a statement. “Winter storms and flooding cost the state billions of dollars this year and an El Niño system is expected to bring record-breaking heat and deadly wildfires this summer and fall. We’re in a climate emergency and we need to do everything we can to prepare, not slash funding for programs designed to keep Californians safe from climate extremes.”

“We urge Governor Newsom and the legislature to find ways to close the deficit without cutting $6 billion in climate investments. It is encouraging that state leaders are exploring a climate bond to generate revenue. We hope they will also commit to eliminating the millions of dollars in subsidies and tax breaks for fossil fuel corporations. Governor Newsom and state lawmakers have a choice to make — hold fossil fuel corporations accountable for the mess they made or pay the price in lives in dollars for years to come.”

Other cuts include temporarily delaying subsidized child care program expansions, funds for small businesses to help with lingering debt, further cuts to education by reducing arts funding, and ending middle class tax refund and low-income utility assistance programs early. While other solutions have been proposed, such as increased taxes on corporations, Newsom has shut them down, favoring the cut and increased bond plan to keep the state afloat for a year.

“We had a $54 billion deficit in 2020, huge surpluses in 2021 and 2022, and now are back down to a big deficit,” explained accountant Lee Greenman, a California-based accountant who helps city and other regional entities fix budget problems, to the Globe on Friday. “It’s crazy. And the state doesn’t think long-term. For cities, mot have a rule of thumb to put surplus money away during good times to help out during the leaner years or to avoid having to go to residents to pass some emergency measures in November.”

“The state, wow, they just see a surplus and decide to just spend it rather than save it for times just like this. It’s not that sustainable. Yet they continue to do so. But they’ve chased out many wealthy people, raised taxes, put a squeeze on businesses, drastically increased spending, then thought it was a good idea to just give a stimulus. And that’s only some of the things. All of it added up to something bad happening, and, well, here we are.”

Click here to read the full article in the California Globe

If it’s January it must be budget time in California, or so it would seem. Gov. Gavin Newsom held a press briefing to unveil his proposed budget, and it certainly looked official.

Mainstream media have variously reported that the governor’s budget proposal is “austere,” “fiscally responsible,” and even “conservative” as the state tries to close a projected $22.5 billion deficit. But there are things taxpayers should know before breaking out the champagne to celebrate the governor’s handling of what he has called a “modest shortfall.”

A spending problem, not a revenue problem.

The governor’s proposed $297 billion budget is only about 3.6% smaller than last year’s record-setting budget of $308 billion. The state has long spent beyond its means, but it has kicked it into overdrive in recent years. In just the last three years alone, spending has increased by almost $100 billion dollars despite warnings from economists, the Legislative Analyst’s Office, HJTA and many others that the state was spending beyond sustainable revenue levels.

This is not the real budget.

They may call this a budget, but it is just a wish list. It is a way for the governor to signal his priorities to the Legislature as budget negotiations begin, and legislators from the governor’s own party have already been critical of the cuts he is proposing.

We also do not know what the actual dollar amount will be yet. In November, the budget shortfall was estimated to be around $24 billion. The governor now says it is $22.5 billion. We will have a better idea of where the state stands financially when the governor does his “May Revise” of the budget.

That is not the real budget either.

The May Revise is also not the budget, it is just another step in the negotiation process. It gives us a better idea of what the actual numbers are, and the governor will adjust his wish list accordingly, but it is the Legislature that passes the budget, and they have until June 15th to do it.

That is not really the budget either.

While the Legislature will pass a “budget” by June 15th, it also is not really the budget. That is because Proposition 25, entitled the “On-Time Budget Act of 2010,” says legislators forfeit their pay if they do not pass the budget “on time.” The problem with that is, the courts have ruled that it is the Legislature itself that defines what is and is not the budget.

What we will get then is not a true annual spending plan for the state but a 1,000-page sham, drafted largely in secret and full of blanks to be filled in later through hundreds of “budget trailer bills” after substantial provisions of the budget are negotiated behind closed doors among just three people: The two Democratic legislative leaders and Gov. Newsom.

On Wednesday, 121 of these budget-related bills were introduced in the state Legislature, completely blank except for a line of placeholder text expressing the “intent” to fill them in later. They are numbered SB 100 through SB 220. You can “read” them for yourself at leginfo.legislature.ca.gov.

Eventually, those budget-related bills will spring to life with new language replacing the placeholder text. Then they sail through the process without hearings, or amendments or debate.

A balanced budget in name only.

Click here to read the full article in the OC Register

Gov. Newsom got a reality check from the Legislative Analyst on Friday

Last week, California Governor Gavin Newsom presented a $297 billion 2023-2024 budget plan on Tuesday, with a projected deficit of $22.5 billion. He shaved $3 billion off his last budget, in the face of a recession, and the $22.5 billion deficit.

In November, the Legislative Analyst’s Office reported California revenue is $41 billion below expectations, likely resulting in a massive $25 billion shortfall in the upcoming 2023-2024 state budget – on the heels of reveling in a $31 billion surplus? How?

“Gavin Newsom (D-Fantasyland) got a reality check from the Legislative Analyst on Friday, when the nonpartisan office called for greater spending cuts and disputed the Governor’s contention that the state won’t face a recession in the coming years,” reads a press statement from the California Assembly Republican Caucus. “Legislative Analyst Calls Bull on Newsom Budget Projections,” the title says.

This is Priceless.

But they are right. The Legislative Analyst’s Office did indeed present a report to the governor recommending other cuts, and offering their solutions to the Legislature if the governor won’t budge.

The LAO identifies these problematic areas with Gov. .Newsom’s budget projections:

• $14 Billion in Higher Revenues
• $3 Billion in Higher School and Community College Spending
• A $4 Billion Set‑Aside in the SFEU. The Governor proposes the Legislature enact a year‑end balance in the Special Fund for Economic Uncertainties.
• $2 Billion in Discretionary Spending
• $800 Million in Other Differences

Specifically, the Legislative Analyst’s Office is concerned that Gov. Newsom is planning for spending more despite lower revenues. They say it a little differently: “Our estimates suggest that there is a good chance that revenues will be lower than the administration’s projections for the budget window, particularly 2022‑23 and 2023‑24. Nonetheless, the Governor’s budget trigger restoration proposals implicitly place more emphasis on revenue upside—suggesting the administration anticipates that revenues are more likely to be higher, not lower, than their current projections.”

Could Gov. Newsom have a serious case of recession budget denial?

The Legislative Analyst says:

“Recent budgets have allocated or planned tens of billions of dollars for one‑time and temporary spending purposes in 2021‑22, 2022‑23, and 2023‑24. The Governor’s budget identifies one set of recent augmentations to reduce or delay in order to address the budget problem. The Legislature can select entirely different spending solutions. To assist the Legislature in this effort, we have provided a list of large augmentations provided in recent budgets in Appendix 4 and a set of criteria for evaluating them for reduction or delay in “Chapter 2” of this report. The Legislature could apply these criteria through its budget oversight hearings throughout the next few months.”
 
The LAO’s report describes a “heightened risk of recession” and urges the Legislature to “plan for a larger budget problem by identifying more spending reductions,” the caucus said.

The LAO said:

“As the Legislature works to address the budget problem, we suggest policymakers consider the unique impacts of inflation on each of the state’s major spending programs in conjunction with possible budget solutions. (See our report, The 2023‑24 Budget: Considering Inflation’s Effect on State Programs, for more information.) 
 
“Meanwhile, economists surveyed by the Wall Street Journal say there’s a 61% chance of the economy tipping into recession within the next year,” the caucus said.  
 
“If the governor and legislative Democrats don’t accept the reality that the economy is in trouble, middle-class Californians will pay the price for their fiscal recklessness,” Assembly Republican Leader James Gallagher (Yuba City) said.

Here’s one area the LAO lays out as a problem – “new discretionary spending”: “The Governor’s budget also includes $2 billion in discretionary spending proposals that are not currently reflected under current law or policy,” the LAO reports.

“In addition to addressing a budget problem, the Governor’s budget proposes $2 billion in new discretionary spending mainly in capital outlay financing, resources and environment, and other miscellaneous program areas. Because of revenue shortfalls, these new spending amounts contribute to a larger budget problem and necessitate additional budget solutions. That is, for each dollar of new proposals, another dollar of solutions would be required. While the Legislature might share some of these priorities, it need not adopt all, or even any, of the associated proposals. Rejecting them would reduce the budget problem and the number of solutions necessary.”

Assembly Republican Leader James Gallagher is right, and it is likely to be worse based on the Wall Street Journal survey of economists:

• Economists expect GDP to stagnate this year, posting growth of just 0.2% in the fourth quarter of 2023 compared with the fourth quarter of 2022.
• Employers are expected to cut jobs starting in the second quarter through the end of the year.
• Economists view high inflation, and the Fed’s efforts to tame it, as a top risk to the economy this year.
• When asked which category of inflation will be the hardest to tame in 2023, a quarter of economists picked housing. A further 18% said healthcare and another 18% picked personal services.
• Economists in the survey expect the Fed will need to raise the benchmark federal-funds rate target to 5% this year, in line with central-bank officials’ own projections.

The perfect storm for a recession may be upon us with high inflation, high taxes, high energy costs, high food costs, a sizable budget deficit, and now tens of thousands of big tech layoffs, which is the other issue California lawmakers and governor need to address. Meta, Twitter, Salesforce and now Amazon are all cutting thousands of staff. The potential for, or early economic ramifications to the cities and counties in which they reside, as well as the state, and the ripple effect these could have on startups and investment banks, looks to be immense.

Click here to read the full article in the California Globe

A review of California Governor Gavin Newsom’s State Budgets 2019-2023

In June of 2022, the California legislature passed Gov. Gavin Newsom’s $300 billion budget – the largest in state history.

In June 2021, the California Legislature passed Gov. Newsom’s $262.6 billion 2021-2022 budget.

In June 2020, the California Legislature passed Gov. Newsom’s $202.1 billion state budget, confirming state spending for the 2020-2021 fiscal year.

In May 2019, Gov. Gavin Newsom released his revised budget, highlighting the largest tax revenue windfall in California history. Gov. Newsom’s first budget approved in June of 2019 contained a record number of local pork-barrel projects injected by individual legislators into California’s largest state budget ever (at the time) of $215 billion. California Globe covered in great detail this record making budget.

For context, when Gov. Jerry Brown returned to office eight years earlier in 2011, his first state budget was $98 billion, and increased to $200 billion by 2018 — a 110 percent increase in eight years, with a population increase of just three million.

In just his first five months in office, Gov. Newsom increased the state budget $5 billion – even with a tax revenue windfall.

One year ago in November 2021 the Globe reported, “California will have a $31 billion surplus next year,” according to the 2022-2023 California state budget Fiscal Outlook report compiled by the Legislative Analyst’s Office.

The tide completely turned in one year.

By November 2022, the Legislative Analyst’s Office reported California revenue is $41 billion below expectations, likely resulting in a massive $25 billion shortfall in the 2023-2024 state budget. The LAO recommended lawmakers start cutting the budget as they begin the January session.

The perfect storm for a recession may be upon us with high inflation, high taxes, high energy costs, high food costs, a sizable budget deficit, and now tens of thousands of big tech layoffs, which is the other issue California lawmakers and governor need to address, the Globe reported. Meta, Twitter, Salesforce and Amazon are all cutting thousands of staff. The potential for, or early economic ramifications to the cities and counties in which they reside, as well as the state, and the ripple effect these could have on startups and investment banks, looks to be immense.

Apropos, Gov. Gavin Newsom presented a $297 billion 2023-2024 budget plan on Tuesday, just $3 billion less than last year, but with a projected deficit of $22.5 billion. That’s down from a stunning $97 billion surplus last year. Where did the surplus go?

The 2023-2024 budget is $82 billion more than Newsom’s first budget in 2019, which was $215 billion. And California is is not growing – the state is bleeding businesses and losing hundreds of thousands of residents to other states.

In 2019, State Sen. Jim Nielsen noted that the state budget was flush $21 billion in surplus revenue. “But that’s not enough for some in the majority party,” Nielsen said. “They want more. They want to raise taxes on water, fertilizer, dairy, tires, guns and businesses.” Nielsen asked, “Why does the state need to raise taxes when there’s $21 billion in surplus? They are spending their way into another crushing deficit that will harm the poor, blind and disabled, and squeeze the middle class once again.”

Sen. Nielsen was right – that spending was the pork-barrel projects injected by individual legislators into California’s 2019-20 state budget.

Responses to Gov. Newsom’s 2023-2024 budget

Remember, last year California Democrats spent a historical budget surplus of $97 billion. “California Governor Gavin Newsom said Friday that his state has a record $97.5 billion operating surplus, as high tax rates on its wealthiest residents mean he has more cash to fund liberal priorities such as education and health care,” Bloomberg reported just last May. “That figure surpasses the staggering $38 billion that they had at their disposal during the previous budget season, then considered the biggest.”

How exactly did the governor and State Democrats make a $125 billion swing in revenue in one year from budget surplus to budget deficit?

“Where did that f-ing money go?” one local taxpayer asked me Tuesday as we discussed the budget.

According to Bloomberg, Newsom’s spending plans included:

• $11.5 billion to every eligible registered vehicle owner, capped at two $400 checks per individual
• $2.7 billion for emergency rental assistance
• $2 billion for affordable housing production
• $1.4 billion for overdue utility bills
• $933 million for hospital and nursing home staff
• $750 million for free public transit
• $125 million to bolster access to reproductive health services

The Globe will research exactly how the surplus was spent.

Senator Shannon Grove (R-Bakersfield) responded to Gov. Newsom’s 2023-24 state budget proposal:

“Governor Newsom’s budget is a band aid on the damage that his over-taxing, over-regulating, and over-spending has done to California’s families and businesses. His budget continues to push the same policies that have resulted in the highest cost of living, the highest poverty, historically high crime rates and a worsening homeless crisis. Where is the accountability? He has spent $30 billion of our tax dollars on housing affordability proposals, but California still has the most unaffordable housing market in the country. Tens of billions have been spent on homelessness but California has the nation’s highest number of homeless.”

Gov. Newsom says he “prioritized the issues that matter most to Californians — despite declining revenues.” Oh, and he’s “transforming education.” Yikes.

One Twitter follower replied, “Transforming education by what, adding a daycare? Seriously? How about improving math and literacy scores?”

Assemblyman Vince Fong (R-Central Valley), Vice Chairman of the Assembly Budget Committee said:

“The Governor’s rhetoric does not match reality. Facing a $22 billion deficit, Governor Newsom’s budget continues his misguided habit to overspend with little accountability. Newsom’s budget again fails to adequately build water storage and conveyance infrastructure to store water and move it across the state. And this budget framework perpetuates ill-conceived energy policies that will stifle needed affordable and reliable energy supplies when Californians are demanding relief.”

Assembly Republican Leader James Gallagher (Yuba City) said:

“Democrat politicians have wasted a record surplus on new social programs and pork projects, while allowing our aging infrastructure to crumble. Now we are faced with a $22 billion deficit as a result of their fiscal recklessness. It’s high time we refocus our budget on the core functions of government.”

“As California bounces between flooding and drought, it is abundantly clear that we need new water storage, and yet there is still no dedicated funding this year or next to meet that need. Instead the Governor protects failed programs that haven’t made a dent our state’s highest-in-the-nation poverty rate.”

Senate Budget Vice Chair, Senator Roger Niello (R-Fair Oaks) said:

“California’s assumption of unending higher revenue, combined with overspending on misguided priorities, led the state down the path to the deficit we have today. And this is in contrast to other states that are considering tax rebates at this same time.”

“Republicans fought to fill the Rainy Day Fund, and we applaud today’s commitment to not tap into it. Recent on-going spending by the governor must be re-evaluated. The governor continues to celebrate how much he spends, but California has yet to see the results.

California Senate Minority Caucus Chair, Senator Janet Nguyen (R-Huntington Beach) released this statement prior to Governor Newsom’s budget proposal announcement:

“Drive down the street,” said Senator Nguyen. “Turn on the news. Go to the gas pump. There are harsh realities facing Californians up and down this state. Taxpayers cannot afford more empty promises and failures. We want results.”

Under Gov. Newsom’s watch, homelessness has increased exponentially, crime is historically high, freedoms have been restricted, taxes greatly increased, non citizens receive health care for free, public school kids’ math and literacy scores are in the toilet, the government-created water shortage has gotten worse…

Click here to read the full article at the California Globe

California faces a projected deficit next year even if the U.S. avoids a recession. Despite the expected shortfall, policymakers say they’ll maintain spending on social programs though advocates are calling for more.

The Legislative Analyst’s Office recently said in its annual forecast that Gov. Gavin Newsom and the Democratic Party-controlled Legislature are facing a $24 billion projected budget deficit for the next fiscal year.

If the state enters a recession the outlook is even worse, with revenues predicted to fall short by $30 billion to $50 billion. The governor signed a record-breaking $308 billion budget in June.

The legislative analyst attributes the projected shortfall to California’s reliance on those whose incomes often ebb and flow with the price of stocks, real estate and other investments.

“Those are the same people who get a lot of their income from financial investments,” said Legislative Analyst Gabriel Petek. “That volatility then gets transmitted directly to the state budget.”

The governor will present a proposed budget in January and then a revision in May. The budget, which the Legislature must approve, will fund state government for the fiscal year beginning July 1.

H.D. Palmer, spokesperson for the state Department of Finance, declined to comment on whether social spending cuts might be proposed.

He did say, however, that the governor’s priority was to not scale back programs that people have come to depend on, or to begin new ones. Some program expansions in later fiscal years could be delayed if there isn’t enough revenue to support them, he said. The goal is to avoid the kind of drastic program reductions enacted during the Great Recession that took years for the state to restore.

Building reserves

The state’s Democratic legislative leaders have said they are not inclined to cut recently expanded programs, such as the extension of free health care to low-income undocumented immigrants, which began with older adults this year and is slated to open up to all ages in January 2024. The expansion is expected to cost more than $2 billion annually.

The budget is in a much stronger position than it was during the state’s last fiscal crisis, said Phil Ting, the Assembly budget committee chair from San Francisco.

“We have a significant amount of cash available, both in terms of reserves, but also in terms of liquidity,” Ting said. “So this is a very different situation than the state faced in 2008-2009, where they were running out of cash.”

The governor, nevertheless, has signaled he is being cautious. Newsom in October said he had vetoed 169 bills and saved taxpayers billions. Seventy-five of those vetoes were directly budget related, with many including boilerplate language that the state was facing “lower-than-expected revenues” and that it was “important to remain disciplined when it comes to spending, particularly spending that is ongoing.”

Among the bills vetoed by the governor earlier this year were proposals to expand government-funded care for new mothers, expand free transit programs for California students and create grants for graduate students in mental health who commit to working at certain California-based nonprofits.

Newsom, whom voters elected to another four-year term, has used surpluses to pay down debts, build reserves and provide direct payments to millions of Californians. 

Recently Moody’s Analytics rated California one of the states most prepared for a recession, citing its reserves.

Nevertheless, California’s budget enacted in June 2021 committed to $3.4 billion in new ongoing spending and is expected to grow to $12 billion in the 2025 budget year. The budget enacted in June of this year committed an additional $2.3 billion, expected to grow to nearly $5 billion by the 2026 budget year, the Legislative Analyst’s Office said.

The state has $37 billion in specific reserve funds. That includes about $23 billion in a rainy day fund voters agreed to strengthen in 2014 at the urging of then-Gov. Jerry Brown. The state also has $900 million in a reserve account for safety net programs. The rest of those reserve funds are in school-specific and general operating reserves.

But, Palmer noted, the state can only draw down the rainy day fund by half in any year. The Legislative Analyst’s Office has advised the Legislature to slow down or pause program expansions before dipping into reserves.

Ting’s office contends the state has billions in unspent federal and state dollars in its coffers that could address a potential deficit. Using that money would avoid cuts to programs but delay other projects. 

Is it time to spend?

Anti-poverty advocates said in interviews they plan to continue pushing for program expansions, arguing the precipice of a downturn is the time to bolster social spending, not cut it. 

Nearly 30% of California residents live in or near poverty, according to the Public Policy Institute of California. Experts expect poverty rates to increase after the end of a boost in federal cash aid, which came in 2021 in the form of an expanded child tax credit included in the American Rescue Plan Act.

Advocates are proposing that California mimic that federal expansion by opening up the state’s Young Child Tax Credit, currently a $1,000-a-year credit for low-income families with children under age 6, to include all children in low-income households. 

They estimate 1 million children live in families that would qualify, at an additional cost of $700 million a year.

Additional tax credits could make a difference to people like Ivonne Sonato-Vega, a medical assistant in Santa Rosa. 

Last year she used some of the $4,000 in federal child tax credits on school supplies and clothes for the four children she and her boyfriend are raising, she said. With prices rising this year, she was unable to save any of that subsidy. 

If the credits were an annual payment, she said, it would allow her to plan for expenses, maybe use it as “a little savings account” to draw on when the children grow out of their clothes or save it for a security deposit if the family needs to move.

“It was kind of like a tease,” she said of the credit. “It was here and then not.”

Advocates said they also want the state to create an unemployment benefits program for undocumented immigrants and to include all low-income immigrants, regardless of immigration status, in its food assistance program. 

“We know the projected budget shortfalls make it more challenging, but the past few years highlighted why something like this is so important,” said Sasha Feldstein, economic justice policy manager at the California Immigrant Policy Center. “People who are excluded from our safety net have been the most adversely impacted from the COVID-19 pandemic and are the most harmed during times of economic downturn.”

Lawmakers and Newsom this year allocated money to expand the California Food Assistance Program, a state version of food stamps, to include undocumented immigrants age 55 and older; the benefits are expected to become available late next year. Newsom vetoed a bill that would have tested an unemployment benefits program for undocumented immigrants, citing costs.

The makings of a budget problem

The projected shortfall is the state’s first major fiscal challenge since Newsom’s office predicted a $54 billion shortfall in May 2020, when the country was in the grips of the COVID-19 pandemic. After financial markets rebounded and the federal government provided unprecedented stimulus, the anticipated shortfall resulted in surpluses.

The Federal Reserve began hiking interest rates in March 2022 to cool inflation. Then housing sales, initial public stock offerings and stock markets fell. All are important sources of personal income tax revenue.

In California, personal income withholding fell even as the job market recovered.

Over the last decade, California has increasingly relied on some of the state’s highest earners to fund its budget which, among other things, takes aim at poverty and some of the nation’s starkest income inequality.

Much of the state’s general fund is paid for by its progressive personal income tax, which voters in 2012 raised on the state’s highest earners after Brown warned of cuts to health and education. In 2016 voters extended those higher income tax rates through 2030 while also allowing a temporary sales tax to expire. The increases, meant for education and healthcare spending, have also paid for increased social safety net spending.

About 49% of the personal income tax paid in California in 2020 came from just 1% of tax filers, according to the state’s finance department. And in the past decade, taxes collected from the most volatile form of income — capital gains — have doubled, making up a larger share of the state’s revenue and tying the state’s budget to particularly unstable economic cycles. 

To address that, voters approved changes to the state’s rainy day fund in 2014. The changes serve as a check on spending, directing California to capture additional dollars in reserve when capital gains tax receipts are high. 

Building reserves large enough for a state to ride through a recession is difficult, said Donald Boyd, a state finance expert at the University of Albany in New York. 

Click here to read the full article at the California Globe