By Amanda Albright and Eliyahu Kamisher | Bloomberg
California Governor Gavin Newsom faced a unique challenge in recent years: an overflowing state treasury. Fueled by the tech industry and federal aid during the pandemic, California was spending large sums of money and maintaining a surplus of nearly $100 billion. Newsom, a rising star in the Democratic party, even distributed checks of up to $1,050 to millions of residents, earning the title of the luckiest governor in state history, according to an editorial in The Los Angeles Times.
However, as the tech industry experienced a downturn and Covid funding ended, California’s surplus has transformed into a $32 billion deficit. This has led lawmakers to make adjustments, such as scaling back the state’s ambitious climate change program, delaying funding, and increasing internal borrowing.
SEE MORE: Recession will cut Orange County home prices 11%, forecast says
While California’s situation is extreme, it is not alone. According to the Urban Institute, revenue is down in 16 other states this fiscal year through April, reflecting market volatility and population shifts. In contrast, states like Florida and Texas, which primarily rely on sales taxes rather than income taxes, have seen revenue growth of 5% or more as consumer spending remains strong.
“You’re starting to see this divergence,” says economist Emily Mandel from Moody’s Analytics. “It’s definitely something we’re seeing in the data.”
The diverging fortunes of states have highlighted the increasing divisions between Democrat-led and Republican-led states. As these states compete for businesses and residents, their leaders often clash over issues like immigration and taxation. Texas Governor Greg Abbott, for example, plans to further reduce taxes with a record $33 billion surplus, while Florida’s 9% revenue increase boosts Governor Ron DeSantis’ chances in the Republican presidential nomination race.
Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, explains that these differing fortunes reflect core differences in states’ tax bases. California and New York, centers of the tech and finance industries, experienced population declines, while Florida and Texas added residents. Additionally, states like California heavily rely on capital gains taxes, which fluctuate with the incomes of high earners.
California’s personal income tax collections, which come mainly from the top 1% of earners, are particularly vulnerable to financial shocks that affect this small group of taxpayers. While California had a surplus during the pandemic, its current recession and falling tax receipts have led to a projected deficit.
Similar pressures are seen in other states with high-income tax rates, such as Hawaii, where the governor had to cut $1 billion from the budget to balance it.
SEE MORE: California’s new budget covers $32 billion deficit without touching reserves
In April, total state tax revenue declined 25%, with 37 states experiencing falling revenue. In contrast, Florida and Texas have been able to maintain tax revenue through sales taxes, which have been bolstered by inflation. However, a recession could still impact these states as higher unemployment may lead to reduced consumer spending and lower sales tax revenue.
Despite the challenges, US states have built up record reserves, preparing them for an economic downturn. For example, California has a $38 billion reserve, the largest in U.S. history. The stock market rally has also provided additional relief, as analysts are seeing a normalization of state tax revenue.
“The days of these booming revenues have come to an end,” says Tammy Gamerman, a director for Fitch Ratings.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
