How California's budget deficit of $27.6 billion might complicate Gov. Newsom's plans

California has a budget deficit of $27.6 billion, Gov. Gavin Newsom announced Friday — a gap so wide that he's proposing cutting 10,000 vacant state jobs and suspending some widely used business tax deductions.

The Democratic governor outlined the deficit Friday as part of his proposed $288 billion state budget for the fiscal year that starts July 1. It's the largest of any state.

“These are programs, propositions that I’ve long advanced -- many of them," Newsom said. "But you’ve got to do it. We have to be responsible. We have to be accountable.”

Newsom also is proposing to cut funding for 260 different state programs. One-time cuts would include $2 billion for broadband that would have expanded broadband connections, $500 million that would have improved “water storage” in the drought-plagued state, and $272 million for employment services for the state’s welfare program.

Continuing cuts would save another $81 million by deactivating housing units with 4,600 beds across 13 state prisons, and remove $300 million in pandemic-related help for state and local public health departments. Ongoing spending for a scholarship program for middle class college students pursuing a teaching credential would be cut by $510 million.

The deficit is smaller than the $38 billion Newsom predicted in January, but that's because it doesn’t include $17.3 billion in cuts and other actions he and lawmakers already agreed on to help close it. Otherwise, it would be closer to $45 billion.

This is the second year in a row the nation’s most populous state is facing a multi-billion dollar shortfall. State revenues have continued to fall amid increasing inflation and a slow-down in the state’s normally robust technology industry. Through the end of April, state tax collections from its three biggest sources — personal income, corporations and sales — dropped more than $6 billion below the previous estimate.

Newsom, now in his last term as governor and widely seen as a future presidential candidate, says his plan will address both this year’s deficit and a projected $28.4 billion deficit for the following year. He plans to outline more than $32 billion in cuts to make that happen so that the state Legislature can must pass a spending plan by June 15.

“It’s I think appropriate and prudent for us not to just solve for this year but to also solve for next year,” Newsom said. “We know what we know, but we don’t know what we don’t know ... This is I believe why we need to have a two-year mindset going forward."

Newsom and the non-partisan Legislative Analyst’s Office have disagreed on the true size of the state’s deficit this year. The LAO said in January that the deficit was actually $58 billion when including some reductions in public education spending. The LAO will release its own new estimate next week, and it will likely be larger.

A bigger deficit could force tougher choices. In January, Newsom floated the possibility of delaying a minimum wage increase for health care workers that Newsom signed into law to much fanfare just last year.

“We still have a shortfall. We will manage it and we’ll manage it, yes, without general tax increases,” Newsom said on Wednesday during an event held by the California Chamber of Commerce. “We’re not just going to try to solve for this year. I want to solve for next year. I think it’s too important. We have got to be more disciplined.”

State budgeting is a guessing game, particularly in California, where a progressive tax system means the state gets the bulk of its tax collections from rich people. About half of the state's income tax collections came from just 1% of the population in 2021. This makes the state more vulnerable to swings in the stock market.

If lawmakers and Newsom get revenue projections wrong and the state takes in less than they thought, there's a shortfall. And unlike the federal government, the California Constitution requires the state to have a balanced budget.

Last year, their predictions were way off after a series of destructive storms in January 2023 prompted lengthy delays in tax filing deadlines. Instead of filing their taxes in April, most Californians could wait until November. Lawmakers still had to pass a budget by June, despite not knowing how much money they had.

This January, Newsom said the state’s revenues for 2022-23 to 2024-25 have been coming in $42.9 billion lower than they estimated.

Newsom and lawmakers have already agreed to about $17 billion in reductions and deferrals to reduce the deficit. Plus, Newsom has said he wants to take $13 billion from the state's various savings accounts to help balance the budget.

But these won't close the gap, and California appears headed toward more deficits in the future.

Corporate tax collections are down 15% from last year, the fourth largest drop in the past 40 years, according to the LAO. And while income taxes are growing thanks to a 20% increase in the stock market since October that's driving an increase of 8% in total income tax collections this year, the LAO said growth is unlikely to continue. That's because the broader state economy has not improved — the unemployment rate has risen and investments in California businesses have declined.