California’s tax revenue fell short of forecasts as expectations of a tax windfall late in the year failed to materialize, the nonpartisan budget adviser office said.
The forecast on Friday by the Legislative Analyst’s Office said California’s tax revenue is expected to be $58 billion lower than earlier projections for the current and upcoming fiscal year. The state had expected a surge of tax payments in October and November due to delays in the tax filing deadline caused by natural disasters.
“With the recent receipt of various postponed tax payments, the impact of recent economic weakness and last year’s financial market distress on state revenues has become clearer,” the LAO said. “The postponed payments came in much weaker than anticipated.”
The latest update means California will face another difficult budget year that could force the state to cut back on services and tap into its rainy day fund. The LAO is expected to release another report on the size of California’s budget deficit this month.
High interest rates and the 2022 stock market slump were big contributors to the fiscal woes. The state’s wealthiest residents, who pay the bulk of income taxes, are reporting lower incomes. Corporate tax revenue is also down, and sales tax income has remained flat despite inflation increasing the cost of consumer goods.
Adding to the state’s challenges, elevated borrowing costs have slowed growth in Silicon Valley, a key generator of California’s wealth. Initial public offerings in the state are down 80% in 2022 and 2023 after a surge in activity during the pandemic, according to the LAO.
“These mounting economic headwinds have pushed the state’s economy into a downturn,” the LAO report said, citing rising unemployment and five straight quarters of declines in inflation-adjusted incomes.
Jason Sisney, a budget adviser to Assembly Speaker Robert Rivas, said in a Substack post that the state has tens of billions of dollars in reserve funds to buoy the budget and that more recent stock market gains could also lessen California’s fiscal problem.
Still, he said the new revenue outlook is setting the stage for a “significant budget challenge in 2024, requiring cuts or delays to planned one-time spending and other actions.”
