Key Questions About California’s Budget Deficit Remain Unanswered As Deadlines Loom

The must-follow website this month among California’s politicians, bureaucrats and interest group lobbyists is the “California Personal Income Tax Daily Revenue Tracker” that’s updated daily by the state controller’s office.

Last week was the deadline for filing personal income tax returns, and income taxes are by far the most important source of state revenue. What’s collected this month will have a big effect on the size of the state budget deficit that Gov. Gavin Newsom and legislators must cover, at least on paper, by June 15.

Before April, state revenues from all sources were running $5.6 billion below what Newsom had projected for the current fiscal year in his proposed 2024-25 budget, according to the governor’s budget staff.

The shortfall indicated that the deficit Newsom pegged at $38 billion for the 2023-24 and 2024-25 fiscal years would be substantially greater. The Legislature’s budget analyst, Gabe Petek, declared that under Newsom’s budget the deficit was really $58 billion and that revenue shortfalls already experienced and projected to worsen would push the gap to $73 billion.

The immense disparity between the Newsom administration’s budget picture and Petek’s analysis remains unresolved, but the net personal income tax collections tracked by the controller’s office so far in April appear to be hitting the $16.3 billion administration estimate for the month.

What happens in the seven-plus weeks remaining before the June 15 constitutional deadline for budget passage will center on two related factors: settling on a deficit number and deciding what actions can be taken that would reduce it to zero.

Newsom will release a revised budget in May that probably will peg a deficit that’s larger than what he declared in January in his original budget, but smaller than Petek’s. Newsom will also declare that a recent agreement with legislative leaders on a package of spending cuts, deferrals, loans and other actions will initially reduce the deficit by $17 billion.

Newsom and legislative leaders have every reason, from a political standpoint, to minimize the deficit figure and use as many tools as possible, including gimmicks, to close it.

For instance, Newsom proposes to shift the June 2025 state payroll into July, thus moving several billion dollars of expense from one fiscal year to another. That doesn’t actually save any money, of course, but on paper it reduces the 2024-25 deficit.

The payroll gimmick and other maneuvers, such as borrowing money from special funds and calling it revenue, and tapping into the state’s “rainy day” reserves for at least $12 billion, are aimed at getting through one budget cycle while minimizing real reductions in spending that Democratic legislators, public employee unions and advocates for particular programs would dislike.

Taking the path of least political resistance, however, would simply postpone the day of reckoning because both Petek and Newsom’s budget advisors have said the state faces multibillion-dollar deficits each year for the remainder of Newsom’s governorship.

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.