v 31.40 | California's Looming Budget Challenge
Welcome to Happening in California, a brief look at political news, insights, and analysis of the world’s fifth-largest economy.
Last week, Governor Newsom proposed a $322 billion budget, with no deficit. Then the Los Angeles fires happened.
As part of the state’s response, it is giving all taxpayers in L.A. County until October 15 to file California tax returns on their 2024 income. Quarterly tax payments have also been postponed (for details, check out the latest CalTax Report).
This delay in tax payments could significantly impact California’s notoriously volatile tax revenue, potentially pushing the state budget into the red. Here’s what you need to know…
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Tom Ross | President and CEO | Swing Strategies
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The Big Picture: A Looming Budget Challenge.
California could face a steep drop in tax revenue due to the Los Angeles fires.
Over the past decade, California’s budget has nearly doubled, buoyed by taxable capital gains from a surging stock market and growth in the Silicon Valley tech sector. However, the state’s income tax revenue is notoriously volatile, meaning any disruptions have an outsized impact on the budget.
With a quarter of the state’s population given a six-month delay in paying taxes, California may face a significant cash shortfall.
California’s General Fund Revenue: The Big Three
The state’s General Fund revenue is primarily generated by three key sources:
Personal Income Tax (PIT)
Sales Tax
Corporation Tax
Of these, the largest share by far comes from PIT, which is also the most unpredictable.
PIT revenue is derived from:
Wages and Salaries
Capital Gains
Retirement Income
Business Income
Dividends
Interest and Rent
While wages and salaries account for about 68% of PIT revenue, the portion from capital gains nearly tripled from 2009 to 2021.
Why it Matters: The bulk of PIT revenue growth comes from high-income taxpayers, particularly in the Bay Area and Los Angeles.
Nearly 40% of PIT revenue comes from the Bay Area, which represents only 20% of the state’s population.
Los Angeles and Orange County, making up 36% of the population, contribute 34% of PIT revenue.
This heavy reliance on high-income earners makes California’s tax revenue especially vulnerable to economic shocks and delays like the one caused by the L.A. fires. Estimating state revenue and balancing the budget will now be even more challenging.
The Bottom Line: California’s tax revenue depends heavily on high-income earners in the Bay Area and Southern California. The delayed tax payments from Los Angeles residents due to the fires will complicate revenue projections and could push the state budget into the red.
For more California’s state budget, check out our previous Happenings that examined last year's projected $68 billion budget deficit.