California is likely to see revenue from its three major tax sources fall short of forecasts during the current fiscal year as a slowdown in the economy and the slumping stock market chip away at what had been surging tax collections.
In a post Monday, Deputy Legislative Analyst Brian Uhler estimated that the state’s revenue from personal-income, corporation and sales taxes will likely trail projections by $5.5 billion for the year that ends in June 2023. He said the outlook is highly uncertain, however, and that the collections may range from $26 billion below budget estimates to $15 billion over them.
In May, “we cautioned that economic indicators were suggesting a slowdown could be on the horizon,” Uhler wrote. “More recent economic data has continued to point in this direction.”
The potential shortfall would signal a major shift for the state, whose revenue unexpectedly swelled in the wake of the pandemic as the stock market rallied on the back of massive stimulus from Congress and the Federal Reserve. That delivered windfalls to wealthy residents who account for a large chunk of California’s income tax-revenue.
Those dynamics are starting to kick into reverse, with the stock market sliding steeply this year and the economy showing signs of slowing as the Fed raises interest rates at the steepest pace in decades. The nonpartisan Legislative Analyst’s Office reported that there was a 2% decline in income-tax withholding payments in June from a year earlier, which could have been influenced in part by a drop in compensation from bonuses and stock options.
California has long been prone to booms and crippling deficits because of the sensitivity of its revenue to financial markets, and it has socked away billions to cover the hit of the next downturn. Lawmakers put $37.2 billion into its reserves in its latest spending plan. The state also plans to send $9.5 billion of tax rebates to residents in October.
But the warning of a potential deficit from California adds to signs around the country that governments’ revenues may slow along with the economy. New York City’s estimated personal income-tax payments in June declined to the lowest level since 2017.
The administration of Governor Gavin Newsom has taken steps to safeguard the state from downturns, such as directing the bulk of the surplus to one-time expenditures, financing some construction projects with cash instead of borrowing and planning to pay off debt early, said finance department spokesperson H.D. Palmer.
“That’s going to minimize the potential for disruptions to important programs should revenues enter in a more protracted decline,” he said.
