California facing $58 billion deficit over next two years

Tax payments are coming into California much weaker than expected, leading the state to prepare for a possible $58 billion deficit over the next two years. 

The possible deficit was made public in a report by the nonpartisan Legislative Analyst’s Office (LAO) on Friday. 

The big picture: According to the LAO, tax payments that were postponed because of the damaging storms from early in the year have been much weaker than anticipated. 

• The office estimates 2022-2023 revenues to be $26 billion below Budget Act projections. 
• The LAO pointed to historical experience in its report, stating that the weakness is likely to carry into the next fiscal year as well, leading to the $58 billion shortfall over the two-year period. 
• The LAO will release its Fiscal Outlook next week, which will discuss the ramifications of the revenue shortfall for the state’s budget. 
• Tax collections are down 25 percent in 2022-2023, a similar rate seen during the Great Recession and dot-com bust. 

What we’re watching: The report stated that past downturns similar to what California is facing have been followed by additional issues such as increased unemployment. 

• While the initial projection is that the state will be in a $58 billion deficit, the report said that the forecast is uncertain and revenues could end up $15 billion higher or lower in 2023-2024 and $30 billion higher or lower in 2024-2025. 

What they’re saying: Asm. Vince Fong (R–Bakersfield) serves as the Assembly Budget Vice Chair and called the forecast another wakeup call for California. 

• “For years, I have advocated for fiscal prudence and warned that California’s budget path was not sustainable,” Fong said in a statement. “Our state will continue to face fiscal challenges caused by overspending coupled with an increasingly worsening business climate. Improving California’s economic health requires a real effort to reduce the tax and regulatory burdens that are holding back the economy and forcing Californians to leave our state.” 
• Fong continued, “Californians are rightfully upset – they cannot afford the gimmicks and shell games that were implemented in last year’s budget. We need to get our fiscal house in order.”