Please ensure Javascript is enabled for purposes of website accessibility
Walters: Slowing Economy Could Hit State Budget
dan_walters
By Dan Walters, CalMatters Commentary
Published 6 years ago on
March 17, 2019

Share

Gov. Gavin Newsom’s first budget proposal, unveiled two months ago, took a surprisingly conservative approach, given his promises of high-dollar spending during his campaign for the governorship.

Opinion

Dan Walters
CALmatters Commentary

Newsom said his goal was “a structurally balanced budget over the next four years.” But the budget’s own economic forecast sees “slowing growth” and warns that “risks are rising.”

While he proposed token appropriations to expand health insurance for the poor and pre-kindergarten care and education, his 2019-20 budget would devote most of the state’s hefty surpluses to reserves, one-time expenditures and paying down debt.

It was, in brief, just the sort of cautious budget that outgoing Gov. Jerry Brown would have presented, along with his annual warning that recession may be just around the corner.

Newsom said his goal was “a structurally balanced budget over the next four years.” But the budget’s own economic forecast sees “slowing growth” and warns that “risks are rising.”

In the weeks since Newsom released his budget, we’ve seen several indications that California’s economy, which has been booming for the better part of a decade and generating many billions of extra dollars in state revenue, may, in fact, be slowing.

There’s been a marked slowdown in the state’s once-red-hot housing market, for example, and while unemployment remains at historic low levels—just 4.2 percent in January—job creation also seems to be slowing, in part because employers are having difficulty finding enough qualified workers.

Is California Beginning to Feel That Bite Again?

As it solicited bids for a new bond issue recently, the treasurer’s office listed 12 “economic and budget risks” facing the state, including a “threat of recession,” uncertain international trade policies and the budget’s ever-increasing reliance on income taxes from a handful of wealthy Californians and their investment earnings.

When Brown began his second stint as governor in 2011, personal income taxes provided 53 percent of the state’s general-fund revenue. But as Newsom succeeds Brown, income taxes account for 71 percent. And half of them are paid by just 1 percent of the state’s taxpayers, thanks not only to overall economic gains but also to higher tax rates on the wealthy, which Brown championed.

The proportion of taxes coming from capital gains—a major income source for the one-percenters—has doubled from 4.8 percent to 9.7 percent.

Despite his advocacy for those tax increases, Brown repeatedly warned that relying so much on high-income taxpayers creates higher levels of revenue volatility that bite hard during economic downturns.

During the Great Recession, California saw its general-fund revenue drop by about 20 percent, with most of that decline stemming from reductions in taxable income among the state’s wealthiest residents.

Is California beginning to feel that bite again?

An Incentive for Those With Income Flexibility

State Controller Betty Yee reported this month that two-thirds through the 2018-19 fiscal year, revenue is running several billion dollars under assumptions because of lower-than-expected income-tax payments.

Tellingly, the Legislature’s budget office advises lawmakers in a recent budget overview that “building more reserves than proposed by the governor would be prudent.”

It could reflect a slowing economy, a sharp drop in the stock market late last year and/or high-income taxpayers adjusting to changes in federal tax law, particularly a $10,000 limit on deductions for state and local taxes.

The latter is an incentive for those with income flexibility, such as the ability to defer capital gains, to minimize their state tax exposure.

All of these indicators could be just temporary blips or the harbinger of a downward trend that could undermine Newsom’s hopes of having a balanced budget throughout his first term.

Tellingly, the Legislature’s budget office advises lawmakers in a recent budget overview that “building more reserves than proposed by the governor would be prudent.”

However, Newsom’s fellow Democrats in the Legislature would like to save less and spend more, particularly on expensive entitlements such as health care and early childhood education.

CALmatters is a public-interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.

[activecampaign form=19]

DON'T MISS

San Diego Added to Southwest’s Nonstop Destinations From Fresno Airport

DON'T MISS

Clovis Man Gets 27 Years to Life for Attempted Murder of Estranged Wife

DON'T MISS

$3 Million Gift Will Mean Laptops, Solar Panels, Larger Chapel for This Fresno University

DON'T MISS

Ohtani’s Ex-Interpreter Is Sentenced to 4 Years and 9 Months in Sports Betting Case

DON'T MISS

NCAA Changes Transgender Policy to Limit Women’s Competition to Athletes Assigned Female at Birth

DON'T MISS

Israel Starts Planning for Palestinians to Leave Gaza Despite International Rejection

DON'T MISS

Mayor Says Fresno Needs High-Speed Rail Despite Cost Overruns

DON'T MISS

12 States to Sue Over DOGE Access to Government Payment Systems Containing Personal Data

DON'T MISS

Irv Gotti, Music Executive Who Created Murder Inc. Records, Dies at 54

DON'T MISS

ABC30 Has a New News Director. She’s a Familiar TV Face.

UP NEXT

CA School Test Scores Trail Those of States Newsom Considers Culturally Backward

UP NEXT

A Tale of Two Local Districts: Implementing the CA Classroom Cell Phone Ban

UP NEXT

A Presidency That’s Off the Rails. It Took Only Two Weeks.

UP NEXT

DEI Will Not Be Missed in the Military

UP NEXT

Trump Is Going Woke on Energy

UP NEXT

Why CA Fire Response Could Make or Break These Political Careers

UP NEXT

Don’t Kill FEMA. Fix It.

UP NEXT

Trump’s Plan to Crush the Academic Left

UP NEXT

Trump Leaves Democrats Dazed and on the Defensive

UP NEXT

What’s in Store for California if It Splits From the US?

Ohtani’s Ex-Interpreter Is Sentenced to 4 Years and 9 Months in Sports Betting Case

5 hours ago

NCAA Changes Transgender Policy to Limit Women’s Competition to Athletes Assigned Female at Birth

5 hours ago

Israel Starts Planning for Palestinians to Leave Gaza Despite International Rejection

5 hours ago

Mayor Says Fresno Needs High-Speed Rail Despite Cost Overruns

5 hours ago

12 States to Sue Over DOGE Access to Government Payment Systems Containing Personal Data

5 hours ago

Irv Gotti, Music Executive Who Created Murder Inc. Records, Dies at 54

5 hours ago

ABC30 Has a New News Director. She’s a Familiar TV Face.

6 hours ago

California’s EV Sales Stall. So What Happens to Landmark Mandate?

7 hours ago

31 Arrested in Fresno Human Trafficking Operation

7 hours ago

Find Your Next Career Opportunity Today at FUSD Expo

7 hours ago

San Diego Added to Southwest’s Nonstop Destinations From Fresno Airport

Southwest Airlines added a fourth nonstop destination to routes to and from Fresno Yosemite International Airport. Beginning Oct. 2, travele...

3 hours ago

3 hours ago

San Diego Added to Southwest’s Nonstop Destinations From Fresno Airport

3 hours ago

Clovis Man Gets 27 Years to Life for Attempted Murder of Estranged Wife

4 hours ago

$3 Million Gift Will Mean Laptops, Solar Panels, Larger Chapel for This Fresno University

Ippei Mizuhara, former interpreter for Los Angeles Dodgers baseball star Shohei Ohtani arrives at federal court for bank and tax fraud sentencing on Thursday, Feb. 6, 2025, in Santa Ana, Calif. (AP/Damian Dovarganes)
5 hours ago

Ohtani’s Ex-Interpreter Is Sentenced to 4 Years and 9 Months in Sports Betting Case

The San Jose State University Spartans line up for the playing of the national anthem and player introductions for their NCAA Mountain West women's volleyball game against the Colorado State University Rams in Fort Collins, Colo., on Oct. 3, 2024. (AP File)
5 hours ago

NCAA Changes Transgender Policy to Limit Women’s Competition to Athletes Assigned Female at Birth

5 hours ago

Israel Starts Planning for Palestinians to Leave Gaza Despite International Rejection

5 hours ago

Mayor Says Fresno Needs High-Speed Rail Despite Cost Overruns

5 hours ago

12 States to Sue Over DOGE Access to Government Payment Systems Containing Personal Data

Help continue the work that gets you the news that matters most.

Search

Send this to a friend