ABC News Today

SACRAMENTO, Calif. (AP) – The good times could be over soon for California government.

The nation’s most populous state has had so much cash lately that lawmakers have been spending freely — handing out free health care to low-income immigrants, paying for every 4-year-old to attend kindergarten and sending more of $21 billion in stimulus checks to taxpayers. during the last two years.

That seemingly endless flow of money has begun to dry up as state tax collections have fallen short of expectations for four consecutive months. There’s now an 80 percent chance California will be about $8 billion short when its fiscal year ends next summer, according to the latest estimate from the nonpartisan Legislative Analyst’s Office.

There is still a long way to go, but the downward trend in income is already having an impact. Last month, Democratic Gov. Gavin Newsom blocked a tax cut for manufacturers, halted the expansion of full-day kindergarten programs and rescinded unemployment benefits for immigrants living in the country without legal permission, citing the state’s potential deficit.

“These deficits are not only going to come, they’re going to be wide and we’re going to have to make some adjustments,” Newsom said. “We’re working with the Legislature right now to do that.”

Despite the deficit, California likely isn’t headed for another cash crunch like the one that engulfed the state during the Great Recession more than a decade ago. California had less than $8 billion available to spend at the end of September 2008 during the Great Recession. This year, California has more than $130 billion available, including $37.2 billion in its various savings accounts.

“I think the state is much better positioned for a potential economic recession this time than it has been in modern history,” said Chris Hoene, executive director of the California Budget and Policy Center.

What’s happening in California could be a sign of troubling things for other states. Nationally, tax collections in most states appear to be above expectations so far, according to Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officials. But incomes are growing much more slowly, with states forecasting an average increase of 1.4 percent this year compared with a 16.5 percent increase in 2021.

The problem in California is not jobs, as the state has plenty of people working and paying taxes. California’s unemployment rate tied a record low in September and employment has nearly returned to pre-pandemic levels, although hiring has slowed in recent months.

Instead, the problem is a declining stock market, meaning the rich aren’t making as much money. That’s a problem in California, where a progressive tax system means the top 1 percent of earners pay about half of the state’s income taxes.

The most important factor has been the government’s attempts to curb the rising costs of goods and services due to inflation. The Federal Reserve has done this by raising a key interest rate, which has had a cascading effect on the rest of the economy. As a result, the S&P 500, an index of 500 publicly traded companies in major US industries, is down more than 18% from its January high.

A declining stock market means there’s less incentive for tech startups to start selling shares of stock to the public. Tech companies that “go public” have been a reliable source of cash for the California government, because it makes a lot of people very rich very quickly, and all that money is subject to taxes.

Last year, 206 California-based companies went public, generating huge tax revenue for the state. Fewer than 50 California-based companies will go public this year, according to an estimate by the California Department of Finance, the Newsom administration’s budget agency.

“It’s not to say that the technology itself isn’t a source of strength, although it may not be a source of revenue growing as fast as it was a year ago for the state’s general fund,” Jerry said Nickelsburg, dean of the UCLA faculty. Anderson Forecast, which projects economic trends.

California collects most of its income taxes in April, the deadline for people to file their state tax returns. But the state gets money each month from “tax withholdings”: money companies withhold workers’ paychecks each month and send them to the government. That revenue has dropped significantly since June.

“What this suggests to our forecasters is that there have been layoffs and cutbacks in some of the high-tech, high-wage sectors of the state’s economy,” said HD Palmer, a spokesman for the Department of Finance. “It’s a reflection of the volatility of the stock markets.”

It could also signal some volatility between Newsom and California’s Democratic-controlled state legislature. This year, Newsom chided lawmakers for passing bills at the end of the session that, added together, would have allowed $22 billion in new spending that wasn’t accounted for in the state budget.

Newsom called the proposed spending “remarkable.” He blocked most of it by vetoing those bills in September.

“I made it very clear that we are seeing economic headwinds,” Newsom said.

Assembly Speaker Anthony Rendon, a Democrat from Los Angeles, said lawmakers are making proposals to benefit their districts and the people of California.

“What’s remarkable is that the Senate and the Assembly have managed to come together on the budget in recent years,” Rendon said. “We’ve worked with the Administration to make California’s budget stronger, more resilient and just plain better. We have more reserves and more cash on hand now than ever before. Our differences pale in comparison to this achievement.”

Toni Atkins, the Democratic president pro tempore of the California Senate, said it’s too early to tell what next year’s budget will look like. But he said “we are more prepared than ever to protect our progress and withstand a drop in revenue without damaging program cuts or middle-class tax increases.”

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