Saturday, November 26, 2022

Revenue Surge Permits Huge Hike in Budget Plan

Relying on a “once in a lifetime” surge in state revenues, Governor Gavin Newsom is proposing a revised state budget for 2021–22 roughly $40 billion larger than what he proposed in January, and a whopping $65 billion, or one-third, larger than the budget adopted last summer.

The contrast between the devastation of the global pandemic, and the related social and economic dislocation in California, and the state’s unprecedented fiscal largesse is stunning.

But the conclusion is inescapable: California’s successful entrepreneurs and businesses have led the way in delivering the taxes that will provide an enhanced safety net, more spending on public schools and higher education, relief for small businesses and low-income renters, and even a cash payment to low and moderate income Californians.

CalChamber President and CEO Allan Zaremberg commented that the budget news “highlights the need to encourage policies and develop strategies that ensure businesses can continue to thrive in the state.”

Income Redistribution

In fact, the revised budget proposal represents one of the most audacious income redistributions in California history. 

For the 2020 and 2021 fiscal years, personal income tax receipts are forecasted to be $38 billion higher than what was estimated in January. (Corporate income taxes added up to $4.5 billion to the revenue windfall.) 

The top 5% of earners pay two-thirds of all income taxes, and probably account for an even higher share of the surplus revenues.

Meanwhile, much of the new state spending will be directed to new support and programs for struggling families and businesses, burdened renters, homeless individuals, and low-income college students, among many others. These are traditional and proper responsibilities of state government, and this revenue/spending dynamic should answer critics for whom the only policy construct is “inequality.”

Highlights

Other notable elements of the Governor’s budget proposal include:

A record $24.4 billion in budget reserves, recognizing both the volatility of the state’s revenue sources and the pressures new spending programs exert on budget planning.

About $1 billion to partially replenish the state’s unemployment insurance (UI) trust fund, which is projected to have a deficit of more than $24.3 billion at the end of 2021. This is a notable first step, but the state should step up and make a more substantial contribution. Absent allocation of state funds, employers are required to replenish this fund from higher UI payroll taxes. The pandemic may have been an act of God, but the State bears some responsibility for the subsequent economic shutdown and unemployment.

Payments of more than $11 billion over the next three years to pay down the state’s long-term retirement liabilities.

Increased spending on public schools in the amount of nearly $14,000 per student. The three-year increase for schools and community colleges is $17.7 billion — and this is before additional revenues from the surplus are added. The Governor intends that some of this new spending be used to:

• Offer year-round access to enrichment and extended-day supplemental education programs in low-income communities; 

• Improve teacher preparation and training; 

• Increase support staff, including counselors, social workers and nurses; and 

• Increase access to school-based nutrition. 

California’s four-year colleges and universities will receive another billion dollars in ongoing support. In an effort to make college more affordable for the 3.8 million low-income children in public schools today, the May Revision invests $2 billion to create a California Child Savings Accounts program. 

An enormous portion of the windfall will be devoted to homelessness, a problem Californians identify as second only to pandemic response as their highest priority. The Governor proposes devoting another $11.9 billion over the next two fiscal years to combat homelessness. 

Much of the new, one-time revenues will be devoted to nonrecurring functions like infrastructure, including $5.1 billion to expand and protect water supplies for drought relief; bringing total investments to $3.2 billion for zero emission transportation infrastructure, like short-haul trucks and additional charging and fueling infrastructure to support more clean vehicles; and nearly $10 billion for highway, bridge and rail projects.

Contact: Loren Kaye

Loren Kaye
Loren Kaye
Loren Kaye was appointed president of the California Foundation for Commerce and Education in January 2006. He has devoted his career to developing, analyzing and implementing public policy issues in California, with a special emphasis on improving the state's business and economic climate. He also was a gubernatorial appointee to the state's Little Hoover Commission, charged with evaluating the efficiency and effectiveness of state agencies and programs. Kaye served in senior policy positions for Governors Pete Wilson and George Deukmejian, including Cabinet Secretary to the Governor and Undersecretary of the California Trade and Commerce Agency. See full bio.

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