California is grappling with a significant financial crisis as a result of the substantial outflow of residents and businesses from the state, which is now exacerbating a severe budget deficit. Led by Democratic Governor Gavin Newsom, California is confronted with a historic $68 billion budget shortfall. This dire fiscal situation has rapidly escalated, surging by over $54 billion from a mere $14.3 billion in June, as indicated by a report from California’s non-partisan Legislative Analyst’s Office (LAO) released on Thursday.
Despite this staggering deficit, Governor Newsom continues to assert that California should serve as a model for the rest of the country. The LAO report, while outlining the unprecedented deficit in real dollars, did not explicitly address the billions in tax revenue lost due to the ongoing exodus of residents and businesses from the state. The deficit surge is attributed primarily to a shift in the state’s tax filing deadline and less favorable economic conditions than anticipated.
According to IRS data reported by CNBC in May, California experienced a tax revenue loss of $29 billion in 2021 following an $18 billion loss in 2020. The LAO recommends utilizing the state’s $24 billion cash reserves to alleviate the burgeoning deficit. Additionally, it suggests implementing spending reductions in education, including schools and community colleges. The report advocates for one-time spending cuts and cost reallocations that do not adversely affect essential services.
The report cautioned the legislature to approach such measures with care, highlighting that the available cash reserves might not adequately cover California’s average multi-year deficits of around $30 billion. The suggested long-term solutions included exploring options to increase revenue, implement further spending cuts, or a combination of both.
In 2020, California experienced its first population decline, coinciding with stringent COVID-19 lockdowns. Between January 2020 and July 2022, the state witnessed an outflow of over half a million residents, with the number leaving surpassing those moving in by nearly 700,000. Erin Mellon, the communications director for Democratic Governor Gavin Newsom, asserted in a statement that the governor has adhered to stringent fiscal responsibility since assuming office.
“Federal delays in tax collection forced California to pass a budget based on projections instead of actual tax receipts,” she said.
“Now that we have a clearer picture of the state’s finances, we must now solve what would have been last year’s problem in this year’s budget.
“In January, the governor will introduce a balanced budget proposal that addresses our challenges, protects vital services and public safety, and brings increased focus on how the state’s investments are being implemented, while ensuring accountability and judicious use of taxpayer money,” she added.
