CALIFORNIA – The Legislative Analyst’s Office (LAO) reported, December 1, that California will have a revenue shortage of $58 billion below Budget Act projections over the next two years.
The office says a decrease in tax collections, the impact of recent economic weakness and last year’s financial market distress are causes for the shortage.
Tax collections down
LAO says collections data now show a severe revenue decline with total income tax collections down 25 percent in 2022-23.
“With federal actions postponing deadlines for tax payments on investment and business income for much of the past year, the state adopted the 2023-24 budget without a clear picture of the impact of recent economic weakness on state revenues,” says the report.
The report also says the portion of income taxes collected directly from workers’ paychecks was down 2 percent compared to the preceding year.
Analysts attribute the reduced tax collection to a slowdown of investment in California companies and broader economic weakness.
Higher borrowing costs and reduced investment
The report notes another important factor in reduced revenue was financial market distress in 2022.
“In an effort to cool an overheated U.S. economy, the Federal Reserve has taken actions over the last two years to make borrowing more expensive and reduce money available for investment,” said the report.
The report says home sales are down by about half because the monthly mortgage to purchase a typical California home has gone from $3,500 to $5,400.
In addition, analysts said that the Federal Reserve’s actions have hit important segments of the California economy.
In particular, investment in California startups and technology companies has dropped. The number of California companies that went public in 2022 and 2023 is down over 80 percent from 2021.
As a result, California businesses have had less funding available to expand operations or hire new workers.
The report says these factors have pushed the state’s economy into a downturn. The number of unemployed workers in California has risen nearly 200,000 – a 3.8 percent to 4.8 percent, since the summer of 2022.
Photo credit: LAOWeakness could persist into next year
The report says that whether the recent weakness will continue is difficult to say, however, the odds do not appear to be in the state’s favor.
“Past downturns similar to this recent episode have tended to be followed by additional weakness. For instance, an increase in the unemployment rate similar to the recent period has consistently been followed by an extended period of elevated unemployment,” said the report.
As far as revenue is concerned, the analysts say that the forecast is highly uncertain and it’s possible that revenues could end up $15 billion higher or lower than their forecast for 2023-24 and $30 billion higher or lower for 2024-25.
For more information about the LAO revenue outlook visit https://lao.ca.gov/LAOEconTax/Article/Detail/777?utm_medium=email&utm_source=ActiveCampaign&utm_medium=email&utm_content=EDD+changes+unemployment+contractor+after+scams&utm_campaign=WhatMatters
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