Earlier this year, lawmakers approved a spending plan that included a $72.4 billion surplus. That pushed total state spending above $300 billion for the first time. But tax collections have slowed significantly since then.
California will likely have a $25 billion budget deficit next year, state officials announced Wednesday, ending a run of historic surpluses and acting as a warning to other states about a potential recession.
The deficit will likely lead to some painful spending decisions in the nation's most populous state. But it likely won't affect the state's biggest expansions of government services — including free kindergarten for 4-year-olds and free health care for low-income immigrants living in the country without legal permission. Revenue has increased steadily in California for the past decade. This year, a $72.4 billion surplus pushed total state spending to more than $300 billion for the first time. But tax collections have slowed significantly since Democratic Gov. Gavin Newsom signed that budget into law. This year, revenue is $41 billion below expectations,Democratic-controlled California taxes rich people more than other states, and most of the drop in revenues is because the uber-wealthy aren't making as much money as they used to. The S&P 500, a key indicator of the health of the stock market that drives the incomes of the super-rich, has fallen more than 17% since its peak in January. “Our revenue estimates represent the weakest performance the state has experienced since the Great Recession,” the LAO report said. The future looks bleak. Soaring inflation has made everything more expensive. The Federal Reserve has tried to rein in inflation by raising a key interest rate. A higher interest rate makes it more expensive to borrow money, which eventually causes people to spend less. Although that would control price increases, it also cuts demand for goods and services. That leads to layoffs, meaning people pay less in taxes. “The longer inflation persists and the higher the Federal Reserve increases interest rates in response, the greater the risk to the economy,” the LAO said. “The chances that the Federal Reserve can tame inflation without inducing a recession are narrow.”
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