While Gov. Gavin Newsom polishes his foreign policy credentials with visits to Israel and China, California is experiencing an economic slowdown that could bode ill for the final three years of his governorship.

The state’s latest employment report, issued last week for September, found fewer Californians employed than there were a year earlier, while the jobless ranks had increased by 144,100. The state’s unemployment rate creeped up to 4.7%, the second highest of any state, while the labor force – Californians working or looking for work – continued to decline.

“Census figures released this week reveal the extent to which households continue to leave California,” Taner Osman, research manager at Beacon Economics, said in an analysis of the job data. “The state’s population has fallen by half-a-million people over the past three years and this is filtering through to the economy, where the labor force has shrunk and employers are struggling to find workers.”

The darkening employment picture is particularly evident in the San Francisco Bay Area, traditionally the state’s most prosperous region, whose high-income technology workers have been a major source of income taxes.

The San Jose Mercury News calculated that the nine-county region has seen declining employment for three straight months as technology companies shed staff.

“The Bay Area economy may have shifted from just treading water to a period of backsliding under the weight of higher for longer interest rates, slowing consumer and business demand, and weaker growth in Asia and around the globe,” Scott Anderson, chief U.S. economist for BMO Capital Markets, told the Mercury News.

Outflow of Higher-Income Workers from California

The state’s population loss, cited by Osman of Beacon Economics, has taken on a new and ominous aspect, according to recent research by the Public Policy Institute of California. In the past, PPIC’s demographers have said that losses generally were in lower-income Californians seeking lower costs of living. But they now see a significant outflow of higher-income workers and their families – the people who generate the lion’s share of California’s tax revenues.

The PPIC found that “an increasing proportion of higher-income Californians are also exiting the state. The ‘new normal’ of remote work in many white-collar professions has enabled some higher-income workers to move. Politics might also play a role, as conservatives are much more likely than liberals to say they have considered leaving the state.”

No matter what the motives, California’s population drain negatively affects the state’s finances. Newsom and legislators dealt with a $35 billion deficit in the 2023-24 budget enacted in June and expect another $15 billion gap for 2024-25. Sluggish revenues indicate that the shortfall could be worse.

The six-month delay in the income tax filing deadline, from April to October, made revenue forecasting more guesswork than usual. But last week the deadline was kicked back another month, to Nov. 16, meaning Newsom won’t have much hard data as he finalizes his proposed 2024-25 budget in December.

“Through Friday, October 20, the Franchise Tax Board (FTB) has collected $17.3 billion of personal income tax (PIT) and corporation tax (CT) receipts this month,” the state Assembly’s budget director, Jason Sisney, said in an email. “This is far below the $44.9 billion of FTB collections projected for the entire month of October 2023. Given the previous October 16 tax deadline announced in the spring, I expect FTB would have collected over $30 billion by now if receipts were on track to hit that $44.9 billion projection.”

So did the startlingly low income tax revenues Sisney cites stem from corporations and high-income Californians delaying their filings at the last minute, or does it signal a more fundamental impact of a weak economy?

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

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