California budget deficit seen rising by $15 billion as revenue drops

By Maxwell Adler | Bloomberg

California’s deficit is likely to rise 26% to $73 billion as new data show that tax receipts fell short of earlier estimates, according to the state’s budget adviser.

The new projection for fiscal 2024-25 anticipates the deficit will grow by $15 billion from previous estimates after traditional corporate tax collections declined by more than 33% in December from the year-earlier period, the state’s Legislative Analyst’s Office said in a report released Tuesday. The LAO, as the agency is commonly known, also said California’s income tax withholding and estimated payments have been “fairly weak” as of late.

“If the budget problem increases by $15 billion, the Legislature will need to find a like amount of new budget solutions to ensure the budget is balanced for 2024‑25,” wrote the LAO in its report.

The forecast heightens the possibility that Governor Gavin Newsom will propose more spending reductions when he delivers his budget revision in May. While the governor’s budget already calls for $8.5 billion in cuts including from climate change initiatives, housing and a scholarship program, the LAO highlighted an additional $16 billion of one-time or temporary spending decreases in its latest report.

Newsom and the LAO have been at odds over the exact size of the shortfall. The governor pegged California’s deficit at $37.9 billion when he released his first budget proposal. However, the LAO was skeptical of the governor’s revenue estimates, calling them “optimistic but plausible,” in a report released in January.

The state’s fiscal outlook is complicated by a seven-month extension to the income-tax filing deadline given to people affected by severe winter storms in 2023. The state over-allocated tens of billions of dollars, mainly to schools, based on mandatory budget formulas tied to revenue forecasts that were off partly because of delayed tax payments.

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