How will California deal with current budget deficits?

Governor Gavin Newsom’s budget is essentially a short-term response, dipping the usual bag of fiscal tricks to produce a budget that would be balanced on paper, assuming his $31.5 deficit estimate is accurate.

There are just over two weeks left before the June 15 constitutional deadline to enact a 2023-24 state budget.

It’s as certain as anything in politics can be that the Legislature will pass something it calls a budget. If lawmakers missed the deadline, they could lose their paychecks.

It is equally certain that whatever they enact will not be the final plan for the 2023-24 fiscal year that begins July 1. Due to declining revenue, the state faces not only a multi-billion dollar shortfall in the coming year but the likelihood of continued gaps for several years thereafter.

Furthermore, there is no consensus on the extent of the deficit and no agreement on how the governor and legislators will respond. Meanwhile, those on Capitol Hill are besieged by pleas from those with a stake in the budget to protect their projects and programs and demand even larger appropriations.

When Gov. Gavin Newsom presented his first version of the budget in January, he said the state had a deficit of $22.5 and then increased the deficit by another $9 billion in the revised budget proposal this month.

Right away, however, Legislature budget analyst Gabe Petek told his bosses that it’s actually $34.5 billion and, more disturbingly, stated that the state faces ongoing deficits averaging $18 billion. for several more years.

It is, in the jargon of fiscal experts, a “structural deficit,” meaning that it is built into the state’s finances regardless of underlying economic conditions. All competing versions of the state’s fiscal situation also assume that California will not experience a recession in the near future.

If a recession were to hit, deficits could rise by tens of billions of dollars because California’s revenue system is dangerously dependent on taxing the income of the state’s wealthiest residents, as Newsom’s budget acknowledges.

“California’s progressive tax system, where nearly half of all personal income tax in the state is paid by the top 1% earners, has contributed to extreme budget volatility over the years,” he says. May review. “Maintaining budget stability requires long-term planning in the face of these revenue fluctuations.”

In light of that statement and Petek’s rather bleak long-term projections, will Newsom and the Legislature respond responsibly? Or will they take the easy way out, cover the current deficit with creative accounting and clandestine lending, and ignore the structural deficit until it becomes a crisis?

Newsom’s budget is essentially a short-term response, submerging the usual bag of fiscal tricks to produce a budget that would be balanced on paper, assuming his $31.5 deficit estimate is accurate.

Both Senate and Assembly leaders have embraced budget frameworks that purport to protect vital services but differ in approach. The Assembly’s version would reshuffle the appropriations, while the Senate’s would fill the gap by raising taxes on corporate profits, arguing that a tax increase would simply recoup the money big corporations made from Trump-era federal tax reform.

Although Newsom immediately rejected a corporate tax increase, if the deficit is as wide and chronic as Petek’s projects, budget stakeholders will intensify their demands for some kind of tax increase.

In recent elections, California voters rejected proposed increases in property taxes and personal income taxes for the wealthy. Newsom opposed the income tax increase, now opposes the Senate’s proposed corporate tax, and has also rejected periodic bills to impose a wealth tax.

“A wealth tax is not part of the conversation,” Newsom said of this year’s version. “Estate taxes are going nowhere in California.”

This year’s budget dance will kick off a political row over spending and taxes that will likely continue for the rest of Newsom’s tenure.

Dan Walters is a columnist for CalMatters.