California faces a $22.5 billion budget deficit, Gov. Gavin Newsom said Jan. 10 as he proposed billions in cuts and deferred spending amid a significant drop in capital gains tax revenue.
After the state’s revenue boomed a year ago due largely to a capital gains tax rate that reached nearly 10%, that revenue is now down by $29.5 billion year-over-year, as the capital gains rate fell to roughly 5.5 percent.
As a result, Newsom said, state officials have taken steps to pare down his budget proposal for the 2023-2024 fiscal year and avoid dipping into the state’s $35.6 billion in reserves.
The proposal would delay roughly $7.4 billion in spending to which the state had committed between 2021 and 2024 while reducing or pulling back some $5.7 billion in spending that had been planned over the prior two fiscal years.
“What this means is we’re looking at investments that we’ve committed to over the multi-year, we’ll continue those investments but we’ll just delay some of those,” Newsom said of the $7.4 billion in delayed spending.
The proposal also shifts the source of some investments away from the state’s general fund, using debt from previously issued bonds and other pools of state funding like the Greenhouse Gas Reduction Fund.
Some $4 billion in spending cuts in Newsom’s proposal are so-called trigger cuts, and the spending would be restored next year if the state’s revenue is high enough.
The trigger cuts are primarily centered on the state’s allocations to combat climate change and expand the use of and access to zero-emission vehicles.
The state had previously committed to invest some $54 billion through 2026 to combat climate change, but Newsom’s proposal reduced that to $48 billion, a total which the governor still classified as “unprecedented.”
Newsom noted that the deficit could have been even larger if state officials had not focused on one-time and short-term expenditures during last year’s budget negotiations, which included allocating a surplus of nearly $100 billion.
Roughly 93% of that surplus was used for one-time spending instead of long-term spending projects.
“We’re in the position we are today because we were not profligate as it relates to ongoing spending,” Newsom said.
The proposed budget maintains large investments in the state’s efforts to improve K-12 education and expand housing access as well as the state’s plan to expand Medicaid access by Jan. 1, 2024 to all state residents who meet the program’s income requirements, regardless of their immigration status.
The budget allocates $128.5 billion for K-12 education, representing nearly $24,000 per student across the state, and roughly $39.5 billion for the state’s higher education system, a 2.1% decrease over the 2022-2023 budget.
“This proposal, despite uncertainty surrounding the state’s economic circumstances, reinforces the administration’s commitment to (the California State University), its belief in our mission and appreciation of our successes in transforming the lives of Californians,” CSU Interim Chancellor Jolene Koester said in a statement.
University of California President Dr. Michael Drake also lauded Newsom’s proposed investments in education.
“Governor Newsom has put forward a budget proposal that maintains his strong commitment to the University of California and allows us to continue our important work supporting all Californians,” he said.
The proposal also shaves $350 million off the $11.2 billion in housing-related spending included in last year’s budget, but those cuts will be restored in 2024 if the state’s revenue allows.
In a statement, California Republican Party Chair Jessica Millan Patterson called for Newsom and other state leaders to prioritize “smarter spending” in light of the projected deficit.
“Californians would be best served by this failing governor working with Republicans to find real solutions to our state’s biggest problems,” she said.
Assemblyman Phil Ting, D-San Francisco, argued the state is well-positioned in spite of the reduced revenue, which will allow state officials to continue prioritizing spending on education, housing and health care.
“Thanks to this diligence, there are many solutions available to us to ensure that access to vital services and programs won’t be cut,” said Ting, the chair of the Assembly’s Budget Committee.
Newsom will present a revised budget proposal in May based on updated tax revenue totals. State legislators have until June 15 to adopt the budget before the fiscal year begins on July 1.
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