California prepares for possible economic downturn -

AENN

Updated: 7:00 PM PDT Sep 23, 2022

SACRAMENTO, Calif. —

California leaders have been bracing for a possible economic downturn with state personal income tax revenues billions below what was projected for this time of year and conditions outside of the state contributing to uncertainty about its financial future.

Gov. Gavin Newsom has spent the last few weeks considering hundreds of bills the legislature sent to his desk last month. As of Friday, Newsom has vetoed more than 20 bills that would have created new programs requiring the use of taxpayer dollars.

Some of the bills he rejected included a measure that would have established a pilot program that would have provided funds to community clinics that offer reproductive healthcare, another that would have cut sales tax on new equipment purchases for manufacturers in the state, and a measure that aimed to expand mental health care services for children in schools.

In Newsom’s veto message for the reproductive healthcare measure, AB2320, he wrote in part, “With our state facing lower-than-expected revenues over the first few months of this fiscal year, it is important to remain disciplined when it comes to spending, particularly spending that is ongoing.”

According to the California Department of Finance’s most recent revenue report, the state is $4.4 billion dollars total below projections for the months of June, July and August. July and August are the first two months of the state’s fiscal year.

Department of Finance spokesman H.D. Palmer said Friday revenue is down because of a number of factors, starting with the state’s highest earners. This generally includes Californians who make $500,000 or more a year.

The state’s progressive tax structure heavily relies on those earners. To put it into perspective, Palmer noted in 2020, income tax returns for the state’s top 1% of earners accounted for 49% of the money paid to the state in personal income tax that year, totaling $50.9 billion.

Palmer noted the highest earners tend to get a lot of their income from stock options and capital gains.

“When the stock market does well, they do well, and the state does well,” Palmer said.

But, ongoing inflation, an underperforming stock market, and some layoffs or hiring freezes in high-paying tech jobs have impacted those earners, contributing to the state’s revenue situation. Palmer noted conditions outside of California could further affect revenues including the war in Ukraine, and the Federal Reserve raising interest rates to above 6%, which is the highest they’ve been since before the 2008 recession.

Palmer noted Newsom’s veto messages do not represent a shift in policy from the administration, which had been tracking a potential downturn ahead of state budget negotiations in May. Palmer said the governor’s budget and bill action represent an effort to better prepare for a potential downturn and to avoid draconian and deep state budget cuts should that downturn occur.

California recorded a historic, nearly $100 billion budget surplus this year. Anticipating a potential shift in the state’s financial situation, coupled with state spending laws, Newsom’s administration and lawmakers agreed to use 93% of the money on one-time spending and deposited a chunk of it into the state’s rainy day fund.

The state has $37.2 billion in reserves, which Palmer noted is a record high amount for the state.

“Even though we’re in a good situation at the moment and we’ve had a healthy surplus, we can’t assume that’s going to go on forever,” Palmer said.

If state leaders need to tap into reserves, the governor would first have to declare a fiscal emergency. No more than half of what’s in the fund can be taken out in a single fiscal year. The legislature would need to approve the amount of money the governor proposes to withdraw.

Palmer noted, for now, California’s economic outlook looks positive, with steady job growth and the state notching its eleventh month in a row of increased employment.

The Department of Finance is expected to provide the state’s next economic update in mid-October.