State budgeting in California was once a fairly simple exercise in fiscal policy.
The governor’s budget gnomes could predict quite accurately how much tax revenue would be generated in the next fiscal year, especially since most of it would come from retail sales taxes, a stable base.
An initial budget was issued in January and will be reviewed in May after the April 15 personal income tax deadline gave more concreteness. Legislative leaders from both parties met, sometimes with the governor, and a final budget emerged.
Yes, there were some conflicts. Budgets took two-thirds of the votes of both legislative chambers, so the final product needed bipartisan support. Republicans, usually in the minority, sometimes withheld votes until their demands were met.
Over time, however, the budget process became a political mess, in part because ideological divisions on Capitol Hill became more pronounced. As Democrats drifted to the left and Republicans to the right, what was once collegial combat became a holy war. But this was not the only factor.
As California’s range of services expanded, so did the number of budget stakeholders seeking larger pieces of the pie or protecting what they had. The playing field became much larger after voter approval Proposition 13the iconic property tax cap in 1978 and the state became the primary funder of schools and a large factor in local government budgets.
The cake itself changed. The importance of sales taxes in the revenue stream gave way to the dominance of personal income taxes, which are inherently less predictable, especially since they are mostly paid by relatively few taxpayers at higher income levels.
How Governor Gavin Newsom’s latest budget The proposal, filed last week, notes that “California’s progressive tax system, where nearly half of all personal income tax in the state is paid by the top 1 percent of workers, has contributed to extreme budget volatility over the years.”
That volatility is the main reason for the budget’s projection of a $31.5 billion deficit just 12 months after Newsom declared the state had a $97 billion surplus and boasted that “No other state in the American history has never experienced a surplus as large as this.”
Incomes have not only become structurally less predictable, but have also been subject to changes in national and global economies.
The revised budget deficit is projected even without a recession. But if there were even a modest drop, which many economists expect, due to the Federal Reserve System’s sharp interest rate hikes to fight inflation, the state would take a big hit.
“Based on a moderate recession scenario in fiscal year 2023-24, revenues could decline by $40 billion in 2023-24 alone, largely driven by personal income tax losses “, the budget declares. “The decline in revenue relative to the forecast in the May review could reach an additional $100 billion by 2026-27.”
Revenue drops of these magnitudes would quickly consume the state’s apparently strong “rainy day” reserves.
Budgets they no longer require a two-thirds legislative vote and Democrats have overwhelming legislative majorities, but that, ironically, is another complicating factor.
Periodic increases in revenue, such as last year’s $97 billion paper surplus, whet the appetite of Democratic allies such as unions and health care and welfare advocates for a additional spending and build resilience when times get tough.
Newsom’s budget would curb spending, including bringing back some appropriations from last year. Advocacy groups are leaning on friendly lawmakers to do whatever it takes to keep the money flowing, including tax increases and/or tapping reserves.
One-party control of the Capitol can change the details of fiscal policy, but it doesn’t simplify them.
Dan Walters is a columnist for CalMatters.
