California budgeting used to be easy.
Since retail sales taxes were a steady base, the governor’s budget staff could anticipate tax collections for the future fiscal year.
The January budget was updated in May when the April 15 personal income tax deadline gave greater information. A definitive budget was reached by bipartisan legislative leaders and the governor.
Conflicts occurred. Budgets required two-thirds votes from both legislative chambers, requiring bipartisan support. Republican minorities occasionally withheld votes until their demands were granted.
However, as Capitol ideologies grew, the budget process became a political morass. As Democrats moved left and Republicans right, collegial sparring became holy conflict. That was just one element.
As California’s services developed, budget stakeholders sought higher shares or protected what they had. After voters enacted Proposition 13, the property tax cap, in 1978, the state became the main school funder and a major component in local government budgets.
Pie modified. Personal income taxes, which are less predictable because most are paid by a small number of high-income individuals, replaced sales taxes.
Last week, Gov. Gavin Newsom’s budget plan stated, “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 budget projects a $31.5 billion loss 12 months after Newsom said that “No other state in American history has ever experienced a surplus as large as this.”
National and global economies alter revenues, making them less predictable.
The updated budget’s deficit is forecast even without a recession, but if there is even a mild recession, which many economists fear owing to the Federal Reserve System’s steep interest rate rises to fight inflation, the state will suffer.
“Based on a moderate recession scenario in fiscal year 2023-24, revenues could decrease by $40 billion in 2023-24 alone, largely driven by personal income tax,” the budget states. Revenue losses from the May Revision projection might exceed $100 billion by 2026-27.
Those revenue decreases would swiftly deplete the state’s “rainy day” reserves.
Ironically, budgets no longer require two-thirds congressional approval and Democrats have huge parliamentary majorities, which complicates matters.
Last year’s $97 billion paper surplus whet Democrats’ supporters’ appetites for spending and create opposition when circumstances are rough.
Newsom’s budget would cut expenditure and return some last-year allocations. Advocacy organizations are pressuring favorable politicians to raise taxes or use reserves to maintain funding.
One-party control of the Capitol changes budgetary politics but doesn’t simplify them.
