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Governor Newsom Releases State Budget Revision

By Tom Sheehy

On Friday, May 12, 2023, Governor Newsom released his revision to the state budget he first unveiled in January. When Governor Newsom provided his budget to the Legislature in January, it was intended to solve a $21.5 billion budget deficit. The deficit was a shock following last year when the Governor was touting a budget surplus of almost $100 billion.

The reality is that the surplus never really did show up. The state ramped spending up higher, the revenue didn't come in, and this resulted in a huge budget deficit. What has changed since January is that the revenue has declined even further.

In the May revision, Governor Newsom told us today that the budget deficit is now at least $31 billion. There are a number of budget analysts and revenue forecasters, in Sacramento and in the state, who watch the state's budget, and these experts believe that this number may actually grow considerably higher. 

In addition, the budget writers in Sacramento are having a difficult time forecasting revenue, because the Internal Revenue Service delayed the deadline for turning in 2022 tax returns and tax collections. This was delayed from the historical April 15 date and pushed back to October.

As a result of giving taxpayers more time to turn in their taxes, we've seen a drop in estimated payments. The bottom line is that the California Department of Finance and other revenue forecasters won't know for sure how much money they have to work with until October, when the tax filing deadline happens, and everybody completes their taxes.

Though we have a budget deficit, of course, the Democrats in the Legislature don't want to cut spending. They've made a lot of increases in education spending, health and welfare spending, and other social programs that are important to them and to the needy populations in the state that need that support.

A couple of weeks ago, the Senate Democratic Caucus here in California came out with a budget plan, and the centerpiece was a large tax increase on corporate Californian taxpayers. It's interesting to note that the same day that the Senate Democrats proposed a massive tax increase, Governor Newsom came out and said he wouldn't support that nor sign such a bill if it came down to his desk. Now, many people believe that the Governor said that so quickly to send a signal to wealthy people in the state that he wasn't going to support higher taxes. We already know that the top 1% of taxpayers in the state are already paying 50% of all the revenue coming into the state's personal income tax.

We don't know for sure why Governor Newsom has rejected tax increases so quickly, but he has, and some people think it's a way of him virtue signaling to wealthy people. He's not going to support this tax increase because California has already lost a net 750,000 taxpayers over the last few years and Governor Newsom doesn't want to see any more wealthy taxpayers leave the state.

Tom Sheehy is former Chief Deputy Director of the California Department of Finance and Principal and Founder of Sheehy Strategy Group