California: Record spending as tax revenue collapses by $5 billion

As California governor Gavin Newsom announced plans for a record $144.2-billion spending plan, the state controller quietly reported a $4.82-billion collapse of state tax revenues.

Gov. Newsom's Proposed 2019-2020 Budget, released on January 9, had all the characteristics of "Rainbows, Butterflies, and Unicorns."  Newsom predicted that his state budget beginning on July 1 would feature $6 billion more revenue and only a $100-million increase in spending, despite a $5.2-billion "Cradle-to-Career" education spending increase, a $1-billion earned income tax credit, and $100 million for immigrants fleeing Central America.

Key to Newsom's 2019-2020 budget dream is collecting $4.8 billion more in personal, sales, and corporate tax receipts while slashing "Government Operations" expenditures from $4.8 billion to $1.26 billion, a 76% reduction.

After he campaigned for a $100-billion "Medicare for All" health plan, the San Francisco Chronicle ran the headline: "Gov. Newsom angers no one with budget, puts off big fights for another day."  The Chronicle complimented the new governor for providing "plenty to delight his progressive backers" and working to "avoid enraging more fiscally conservative Californians."

But away from the Klieg lights and fawning media, California state controller Betty Yee reported that California's personal income tax collections for the month of December missed its 2018-2019 budget estimate by $3.45 billion.  More alarming, personal income tax revenue plunged from $11.5 billion in 2017 to just $6.76 billion in 2018.

With California's top 1% of income-earners who make over $500,000 a year paying over half of all state taxes, a portion of the grim tax collection shortfall could have been due to mail delays for filing December quarterly estimated income tax payments.  But December 2018 sales tax receipts of $1.16 billion also missed budget by $1.42 billion, and corporation tax collections of $2.09 billion were short of estimates by $179.5 million.

At the start of the July 1, 2018 fiscal year, California's had a mandatory "Special Fund for Economic Uncertainties" reserve with $8.91 billion and a discretionary "Budget Stabilization Account" reserve with $11 billion.  The non-partisan Legislative Analyst's Office's November update stated that reserve accounts were expected to grow by $3.1 billion this fiscal year and $6.4 billion in the next year.  But the LAO cautioned that with wage and job growth already falling, "the state's budget condition can change quickly."

All of this "Rainbows, Butterflies and Unicorns" contingency planning for California to survive a "moderate recession" was predicated on termed out Gov. Jerry Brown's 2018-2019 budget ending on June 30 with a $20-billion surplus.  It probably did not evaluate the cost of the PG&E utility filing for bankruptcy or 30,000 striking L.A. teachers.

If the December tax shortfall means that California is already in recession, the state may be facing a devastating crisis.