Newsom releases plan to close $22.5 billion budget gap

He said he would balance the budget without making major cuts to state services or touching the rainy-day fund.
California Gov. Gavin Newsom (D) (AP Photo/Julia Nikhinson, File)

As lawmakers in most states prepare to spend massive surpluses this session, California Gov. Gavin Newsom (D) on Tuesday announced his plan for filling an estimated $22.5 billion budget gap.

Newsom said he would balance the budget without making any major cuts to state services.

“We are protecting the most vulnerable Californians, despite the situational challenge, and are continuing unprecedented medium and long-term investments,” Newsom said during his presentation.

California faces a revenue shortfall primarily because the slumping stock market has depressed the earnings of the state’s wealthiest residents — and thus the income tax dollars the state collects from them. California has also been hit hard by the downturn in the tech sector.

Newsom said his budget team expects revenue from taxing investment earnings and other capital gains to comprise 5.52% of state revenues in fiscal 2024, down from 9.75% last year.

He began his presentation with a chart showing California’s fluctuating capital gains revenue over time. “I could just end this speech right here by showing you this capital gains slide,” he said, adding that it sums up the boom-bust nature of the state’s tax structure.

Newsom’s overall fiscal 2024 budget would be just 3% smaller than the record $308 billion package lawmakers approved last year. He’d preserve funding for priorities such as addressing homelessness and expanding access to health care, while increasing funding for K-12 education, natural disaster relief and combating substance abuse.

Newsom noted that almost all the new spending approved last year paid for one-time expenses, helping California avoid major cuts in the coming fiscal year.

To fill the budget gap, Newsom proposed $5.7 billion in spending cuts and $3.9 billion in reductions that would be automatically restored next year if the fiscal outlook improves. He said much of that $3.9 billion involves climate and transportation funding that the state may be able to backfill with federal dollars.

He also proposed delaying some spending, particularly capital spending, and fiscal strategies such as converting some cash projects back to bonds and renewing a tax on health insurance plans.

Newsom’s budget wouldn’t include dipping into the state’s $35.6 billion in reserves, including its $22.4 billion rainy-day fund, although that could change if the economy dips into a recession.

“We’re not touching the reserves, because we have a wait-and-see approach to the budget, in terms of being cautious, and being prepared in the May revise when there’s more clarity,” he said. Newsom will offer revisions to his budget plan in May.

California’s situation is somewhat unique. Most states are heading into fiscal 2024 with enormous tax surpluses to spend — in some cases, the largest in state history.

Low unemployment and rising wages have driven up income tax collections in most states. Rising prices have driven up sales tax collections. And high energy prices have boosted revenue for states that tax oil and gas production, such as New Mexico, Texas and Wyoming.

Texas lawmakers have a record $188.2 billion to spend over the next biennium, 26.3% more than the last two-year budget, the state Comptroller’s office announced Monday. It’s so much money that lawmakers may not be able to spend it all without violating limits set by the Texas Constitution.

New Mexico’s general fund revenues shot up last fiscal year and are expected to grow 11.4% more this fiscal year. Lawmakers are headed into session with more than $5 billion in surplus cash, enough to cover 60% of the state’s annual budget, according to the state Department of Finance and Administration.

Texas Comptroller Glenn Hegar, a former Republican state legislator, noted at a Texas Tribune event Monday that boom years bring with them a flood of spending proposals that can be tough to prioritize.

“Legislators know this, and they’ll even say it,” he said. “It’s easier for a budgeting cycle when you have no money, because all you’ve got to do is say no.”