California’s tax revenue could drop by $11 billion more than Governor Gavin Newsom projected in the event of an economic downturn, exacerbating deficit woes, the state’s nonpartisan budget adviser said.
The new forecast by the Legislative Analyst’s Office comes after Newson on Friday forecast a $32 billion budget hole — $9.3 billion more than a January forecast — due to sharp drops in income for the state’s wealthiest residents who pay the bulk of income taxes.
Newsom proposed a $224.1 billion general-fund budget for the fiscal year starting July 1.
The LAO report, released over the weekend, said Newsom’s revenue outlook carries “considerable downside risk” and doesn’t fully account for the effect of a potential recession on California’s three main revenue sources: personal income, corporate and sales taxes.
Read more: California’s $32 billion deficit adds to economy’s woes
The latest forecast adds another sobering element to negotiations between the governor and the legislature, which must pass a budget by June 15. The projected deficit of $32 billion already means that Newsom and legislative leaders, all Democrats, must consider potential cuts to many popular programs, including education, climate change and transit.
Newsom has rejected calls from top lawmakers to increase taxes on corporations to fill the looming budget shortfall.
Should an economic downturn hit consumer spending and corporate earnings,“there is a good possibility that rising interest rates and tightening credit soon will push the economy into a broader slowdown, leading to further revenue declines,” the LAO said.
H.D. Palmer, a spokesperson for Newsom’s Department of Finance, said the main difference between the forecasts is timing around California’s economic recovery. The LAO projects steeper short-term revenue losses and a stronger bounce back in the coming years while the administration assumes less revenue losses this year followed by slower tax revenue growth in the following years, he said.
California has been hit by two consecutive quarters of sinking sales tax revenue, conditions not seen since the dot-com bubble in the early 2000s and the Great Recession, the LAO report said.
The LAO said the “muddy” economic pictures makes its forecast highly uncertain, acknowledging that strong employment could bolster California’s economy. Total revenue could swing in either direction as much as $50 billion through the 2026-2027 fiscal year, the advisers said.
