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California tax revenue ‘windfall’ now uncertain

The state Capitol in Sacramento, the seat of California government. (Photo: Always Wanderlust, via Shutterstock)

That $26 billion dollar “windfall” that California lawmakers learned about last month may not withstand a second round of economy-squelching lockdowns, and the risk of losing what little leverage they have is a top concern for state budget writers.

“We still think there could be a windfall,” said Gabriel Petek, the Legislature’s nonpartisan financial advisor, “but it could be considerably lower.”

Petek’s own November report to the Legislature cautioned that the real number could be anywhere from $12 billion to $40 billion.

Gov. Gavin Newsom reportedly told a technology industry group on Tuesday that the expected tax revenue surge for the 2021-22 state budget would be $15.5 billion

In fact, there’s no guarantee it will be anywhere at all.

“We should point out,” said the Harvard-educated Petek, “that there is an extraordinary level of uncertainty.”

That’s how California reaped its windfall in the first place — uncertainty.

Using standard economic reasoning that a depressed economy would yield fewer taxes — rational thinking — the state’s number crunchers figured taxable income could drop 15 percent, and the Legislature passed a balanced budget reflecting that lower number.

But then a funny thing happened, even as regular people flooded unemployment lines and suffered grinding privations, the stock market kept chugging along. In fact, it outdid itself. And, because California’s tax structure leans so heavily on the big-money stockholder set, when they did well, so did the tax collector.

But the fiscal year is far from over. California’s monetary calendar starts July 1 and ends June 30 of the following year.  The fact that tax collection has been so good thus far, is, of course, good news. But there’s no telling whether it will last all year, something well understood by the Assembly’s budget writer, Assemblyman Phil Ting, a San Francisco Democrat.

Ting said from the start, as soon as the projected surplus was announced, that however many billions the state may ultimately dedicate to COVID relief — particularly for workers and small business — it won’t be enough without federal intervention.

“The improved fiscal outlook gives us a little breathing room,” said Ting, “but we still need help from the federal government.”

The entire state General Fund — most of which is tied up in mandatory spending — is at best only 7 percent of California’s massive $2 trillion economy.

All of this, says Petek, underscores the need for timely action. The likelihood of having an extra $26 billion (or fraction thereof) isn’t going to present itself again any time soon. In fact, after the illusive windfall of 2020, the state is on a trajectory of imbalance, needing more taxes, less spending or some combination of both to balance its books for the foreseeable future.

“The windfall we established provides us with some real tailwind going into future years,” he said.

But they need to use it fast.


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