California State Budget Situation Is Murky
Between mass layoffs in technology, significant declines in the stock market, and large state revenue reductions, every indicator seems to be pointing to trouble for California’s economy.
“The State of California's budget situation is in really murky waters,” says former Chief Deputy Director of the California Department of Finance, Tom Sheehy, Principal and Founder of Sheehy Strategy Group. “When the country gets a financial cold, California gets a severe case of influenza. We are very sensitive to changes in the economy.”
In an unprecedented announcement from the IRS, the income tax deadline has been extended to October for many Californians. This extension is meant to serve as relief for individuals and businesses that have been affected by the historic storms in the Bay Area, Southern California and the Central Valley.
However, this extension also delays tens of billions of dollars from high-income taxpayers, bringing January personal income tax collections down by nearly 70% for the Franchise Tax Board.
“The budget writers in Sacramento have their work cut out for them,” notes Sheehy, referring to the upcoming Governor’s May Revision for 2023.
The income tax deadline extension will have significant effects on the budget process. Revenue data for 2023 will be incomplete till the end of the year, and large swings in revenue receipts are likely making budget writing difficult at best. Although withholding for wage earners continues, quarterly filers have simply stopped making payments. These filers, largely the top 1%, account for 50% of all personal income taxes collected in the state so their tax returns are critical to state financial wellbeing.
“Since the wealthy in California pay a large percentage of the personal income tax, we won't really know how much the economic slowdown is impacting state revenues until October,” Sheehy adds.
The state is experiencing its first major budget deficit since the Great Recession in 2008. However, the difference between then and now is that is that California is beginning this year in a good cash position. “This time, the state is flush with cash,” observes Sheehy, citing close to $40 billion in budget reserves and a vast amount of borrowable resources. Cash balances are projected to remain above $100 billion through October.
“During the Great Recession, it was not only a budget crisis for Sacramento state government budget writers, but the state was actually running out of cash,” explains Sheehy. “ The Governor’s Finance team had to take a number of different actions in order to preserve and protect its cash position so that it could pay its general obligation bond and related debt service.”
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