California is likely to see a $68 billion deficit in its next fiscal year as income tax revenue plummets

California is likely to see a $68 billion deficit in its next fiscal year as income tax revenue plummets, per Bloomberg.

California is anticipated to confront a staggering $68 billion deficit in the upcoming fiscal year, reflecting a substantial decline in income tax revenue. This projection, marking the second consecutive year of shortfalls, poses the risk of potential cuts to crucial safety-net programs, as indicated by the state's budget adviser. The estimated deficit, twice the size of the previous year's shortfall and the largest in California's history, follows an unprecedented downward revision of projected tax receipts, revealed in a report by the state's Legislative Analyst's Office (LAO) on Thursday. The LAO disclosed that tax receipts in the previous year fell short by $26 billion from initial estimates, forecasting a cumulative deficit of $155 billion through 2028.

Gabriel Petek, California Legislative Analyst, emphasized that the multiyear deficits ahead might necessitate challenging decisions. The economic impact of the Federal Reserve's interest-rate increases over the past two years has impeded the state's economy, resulting in higher borrowing costs, decreased home sales, and reduced investments for businesses in California, according to the LAO. The economic slowdown has led to a 25% drop in estimated income-tax payments for 2022-2023, with Silicon Valley experiencing an 80% decline in new California companies going public compared to the previous year.

The state's fiscal challenges were exacerbated by a seven-month extension on the income-tax filing deadline due to severe winter storms in 2023. Overallocation of funds, particularly to schools, occurred based on mandatory budget formulas tied to faulty revenue forecasts stemming from the delayed tax deadline.

The budget crisis is closely linked to the contributions of the state's wealthiest residents, who generate half of California's personal income tax revenue. A stock market downturn in 2022 and elevated interest rates have disproportionately affected top earners. Gabriel Petek recommended that Governor Gavin Newsom declare a fiscal emergency, enabling the state to access rainy day funds. However, he advised preserving up to half of the $24 billion available in budget reserves due to the anticipated shortfalls.

Governor Newsom is expected to present his budget proposal for the next fiscal year in January 2024. The governor and state legislators had previously reached a $311 billion budget deal in June, covering a $32 billion shortfall for the current fiscal year. Notably, the budget agreement included funding cuts to climate change programs and zero-emission vehicle initiatives. The unforeseen extent of the revenue decline was revealed in the fall after an unprecedented delay in tax receipts, according to HD Palmer, a spokesperson for Newsom's finance department.