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California’s already deficit-ridden state budget is being hammered by a confluence of political, fiscal, and economic factors, prompting public employee unions and other interest groups that rely on funding from Sacramento to consider significant tax increases.
Fiscal authorities refer to the budget’s structural deficit as the inability of its revenue system, which is primarily derived from personal income taxes, to produce enough revenue to cover all of the services and programs required by present law.
The persistent shortage is estimated to be between $10 billion and $30 billion annually. The Legislative Analyst’s Office estimated last fall that while revenue was only increasing by 4% annually, state spending was increasing by almost 6%.
By using the state’s emergency reserves, borrowing from special funds, deferring some payments, and implementing some bookkeeping tricks, the $12 billion deficit in the June-enacted current budget was reduced. For example, Controller Malia Cohen recently disclosed that the budget removes payments to lower the state’s steadily increasing unfunded commitments for retiree health care, which reached $91.5 billion, up $6.3 billion from the previous year.
One of the factors driving initial discussions about a tax increase of some sort—which most likely would need to be approved by voters—is the deficit’s persistence.
Another is the cutbacks made by Congress and President Donald Trump on federal assistance to states. Over 25% of California’s $321 billion state budget comes from federal funding, and the cuts mostly affect poverty and health programs like Medi-Cal. To make up for federal cuts, many are turning to Sacramento for funding.
Last but not least, a 2012 ballot initiative that was intended to address a previous budget deficit by imposing a surtax on the incomes of California’s wealthiest families was extended to 2030. Public employee unions in particular, who support it, want to apply for permanent status or another extension.
According to the Franchise Tax Board, the peculiar economics of the COVID-19 epidemic caused surtax revenue to soar to over $16 billion in 2021, but it has since stabilized at a more typical $9–10 billion annually.
Californians already pay some of the highest taxes in the country. According to Wallet Hub, California has the fourth-highest significant state and local taxes of any state, with a total tax burden of 11%.
What sort of tax hike, then, might be suggested? There aren’t many choices.
Since the continuation of the high-income taxpayer surtax is already almost guaranteed to be on the ballot, most likely in 2028, further increase in income taxes would be improbable. The hardest-hit families would be those with lower incomes if the sales tax, which is currently around 10%, were raised.
The California Budget & Policy Center, a left-leaning nonprofit research organization, has been promoting corporate income taxes as the most likely target for years. The group is announcing the closing of what it considers to be corporate tax system loopholes, citing reductions in federal subsidies and federal taxes on firms and wealthy taxpayers.
The group states in a compilation of federal reductions that, in light of the enormous harms that will result from the recently passed federal budget bill, state leaders must devise plans to dramatically increase state revenues in order to balance the state budget and safeguard Californians who are at risk of suffering grave consequences from the federal cuts to food assistance, health care, and other federal policies.
Obviously, something must give. California’s already fragile finances cannot be made worse by further budget deficits as a result of the cutbacks in federal assistance.
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