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How Will Newsom Deal With 'Structural' Budget Deficits That Seem Here to Stay?
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Published 12 months ago on
May 30, 2023

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A little more than two weeks remain before the June 15 constitutional deadline for enacting a 2023-24 state budget.

It’s as certain as anything in politics can be that the Legislature will pass something it calls a budget. If lawmakers missed the deadline, they could lose their paychecks.

Dan Walters with a serious expression

Dan Walters

CalMatters

Opinion

It’s equally certain that whatever they enact will not be the final plan for the 2023-24 fiscal year that begins July 1. Due to declines in revenue, the state faces not only a multi-billion-dollar deficit in the forthcoming year but the likelihood of continuing gaps for several years thereafter.

There is, moreover, neither consensus on the scope of the deficit nor agreement on how the governor and legislators respond. Meanwhile, those in the Capitol are besieged by pleas by those with stakes in the budget to protect their projects and programs and demands for even greater allocations.

When Gov. Gavin Newsom introduced his first version of the budget in January, he said the state had a $22.5 deficit, and then increased the shortfall by another $9 billion in the revised budget proposal this month.

Immediately, however, the Legislature’s budget analyst, Gabe Petek, told his bosses that it’s really $34.5 billion and, more ominously, declared that the state faces continuing deficits averaging $18 billion for several more years.

California’s Structural Deficit

It is, in the parlance of fiscal mavens, a “structural deficit,” meaning it’s baked into the state’s finances regardless of underlying economic conditions. All of the competing versions of the state’s fiscal situation also assume that California does not experience a recession in the near future.

Were a recession to strike, the deficits could grow by tens of billions of dollars because California’s revenue system is dangerously dependent on taxing the incomes of the state’s wealthiest residents, as Newsom’s budget acknowledges.

“California’s progressive tax system, where nearly half of all personal income tax in the state is paid by the top 1% of earners, has contributed to extreme budget volatility over the years,” the May revision says. “Maintaining budget stability requires long-term planning in the face of these revenue fluctuations.”

In light of that statement and Petek’s rather gloomy long-term projections, will Newsom and the Legislature respond responsibly? Or will they take the easy way out, paper over the current deficit with creative bookkeeping and backdoor borrowing, and ignore the structural deficit until it becomes a crisis?

Newsom’s budget is essentially a short-term response, dipping the usual bag of fiscal tricks to produce a budget that would be balanced on paper – assuming his deficit estimate of $31.5 is accurate.

Both Senate and the Assembly leaderships have adopted budget frameworks that purport to protect vital services but differ in approach. The Assembly’s version would reshuffle appropriations while the Senate’s would cover the gap by raising corporate income taxes, arguing that a tax hike would merely recapture money large corporations gained from the Trump-era federal tax overhaul.

Although Newsom immediately rejected a corporate tax increase, if the deficit is as wide and chronic as Petek projects, budget stakeholders will intensify their demands for tax increases of some kind.

In recent elections, California voters have rejected proposed increases in property taxes and personal income taxes on the wealthy. Newsom opposed the income tax increase, is now opposing the Senate’s proposed corporate tax, and also has rejected periodic bills to impose a wealth tax.

“A wealth tax is not part of the conversation,” Newsom said of this year’s version. “Wealth taxes are going nowhere in California.”

This year’s budget dance will kick off a political tussle over spending and taxes that will likely continue for the remainder of Newsom’s governorship.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. For more columns by Walters, go to calmatters.org/commentary.

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