California's budget squeeze

 Sacramento Bee:

California’s independent financial watchdog, the Legislative Analyst’s Office, is sounding a budget alarm that both Gov. Gavin Newsom and the State Legislature may not want to hear, but must.

The state’s heavy reliance on income tax leaves the California budget uniquely vulnerable to the gyrations of Wall Street and the economy. The LAO is estimating that income tax collections fell a stunning 25% during the 2022-23 fiscal year, with some late payments still trickling in. And the pattern appears to be continuing this fiscal year.

Opinion

Absent an unexpected upward shift in the economy, the LAO is bracing Newsom and the legislature to anticipate a $68 billion budget gap. To put this in perspective, Sacramento could exhaust its $22.3 billion in reserves for “budget stabilization” and still face a $46 billion problem.

California has survived these cycles before, but not without severe pain and leaders who don’t sugar-coat the problem. Finance is emerging as a real test for the governor and new legislative leadership.

California taxes higher income earners more than most states — something that Newsom is proud of as a progressive way of revenue generating by government. But this isn’t nearly as reliable a source of income as others, such as property taxes that are limited by a third rail of California Politics, Proposition 13 of 1978.

California companies that go public, for example, can create a stock windfall for its founders and big tax bills. In 2022 and 2023, the number of companies that went public is down 80% compared to 2021, according to the LAO.

The rank and file aren’t doing so well either: The California economy began to turn south in the summer of 2022 and nearly 200,000 Californians have lost their jobs since.

Costs have gone up. The mortgage payment for a median California home has risen from $3,500 to $5,400 in the past two years, in large part due to higher interest rates. Higher costs have resulted in Californians buying less, and the result has been a drop in sales tax revenue. Combine that with the drop in corporate tax revenue and personal income tax revenue, and California has a triple whammy budget problem.
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California is also losing its population.   It would not surprise me if several of the people in the high tax brackets moved to Texas which has no state income tax.  With a loss of population, it should eventually impact the inventory of homes leading to potential price drops.

See also:

Wealthy Californians are fleeing the state, putting tax revenue at risk