Even as California shuts down much of the economy again in the wake of the latest coronavirus surge, the state has received a welcome dose of relatively good news.
The economic rebound has been quicker than expected – and revenues are “consistent with a more positive economic picture,” according to the nonpartisan Legislative Analyst’s Office.
State analysts predict a one-time windfall of as much as $26 billion, which will help during the upcoming budget process. But the LAO predicts budget shortfalls beginning in 2021 as revenues grow at a piddling 1%, with deficits likely to reach $17 billion by fiscal year 2024-25. It is “quite unlikely for revenues to grow fast enough for the budget to break even and erase the operating deficit,” per the report.
The big question is how the governor and Legislature will use the surplus. As columnist Dan Walters explains, lawmakers face a dilemma. They can restore cuts to social programs or set it aside to deal with the coming challenges. He quotes Assembly Speaker Anthony Rendon, who said his top priority is restoring funding to “critical programs.”
Given the economic uncertainty that’s likely to drag on given Gov. Gavin Newsom’s tough new reopening restrictions, Rendon should pump the brakes on additional spending. We believe the state should err on the side of caution by keeping a tight rein on spending and preparing for the budget mess that will continue long after the shutdowns have ended. The state needs to build up its rainy day fund.
It’s too early to discuss reversing recent budget cuts, especially given the state’s growing pension deficits, which are eating into municipal budgets. As Walters added, lawmakers were also banking on a federal bailout to help close their budget gap, which is uncertain at best. And California’s voters wisely rejected a property tax increase on November’s ballot, which would have provided the state with as much as $11.5 billion annually.
The push for spending restoration is rooted in concern about the plight of California’s poorest residents. That’s a legitimate worry given California’s exorbitantly high poverty rates, but legislators need to think more deeply about the way their specific pandemic-related policies are exacerbating economic hardship at the lower rungs of the economic ladder.
Because of California’s steeply progressive tax system and its dependence on capital-gains tax revenues, its wealthiest residents pay the overwhelming majority of income taxes. That $26-billion projected surplus provides stark evidence that wealthy Californians – and the tech industry, in particular – are doing remarkably well despite the recent dislocations.
The pandemic has disrupted the lives of wealthy Californians, but hasn’t kept them from working and investing. Same goes for government employees, who have faced some pay reductions but still have good jobs and benefits. As the LAO explained, “Many low income Californians remain out of work, while most high income workers have been spared.” The unemployment rate has fallen, but remains at a dismal 11%.
We’re relieved the state’s economy is not nearly as precarious as expected and that the budget is weathering the storm. Instead of seeking tax increases and ramping up their spending plans, lawmakers need to carefully reopen the economy so that all Californians can get back to work. They need to hold the line on spending until the pandemic is over.
Written by the Southern California News Group editorial board.
