Terry McAteer: Just one more crisis for Gov. Newsom — California’s budget
The federal government has the ability, as recently shown, to turn on the monetary printing presses … with nothing to back up those dollars.
Sacramento does not have the luxury of that power, as it must live within its means.
In May, Gov. Newsom will be releasing an update to his 2020-21 budget which he first unveiled in January. Since that initial budget, the world of finance has turned upside down. State finances are in real trouble.
The governor, during his two-year tenure, has had fires, homelessness, blackouts, PG&E’s bankruptcy and now the coronavirus to tend to. His saving grace has been a healthy budget to throw money at these issues. That is about to change!
The governor’s “May Revise” will be a shock to homeless advocates, schools, infrastructure planners, fire abatement resources and more, who are expecting the largesse of Sacramento to make them flush. Nope. The state is having to tighten its belt a few notches.
Let’s just take a look for a moment at one huge element of the state budget, sales taxes, and how much is being generated these days. The closure of restaurants, clothing shops and other service providers has caused sales tax receipts to plummet. In January, the governor projected that sales taxes would account for $28 billion in receipts. The coronavirus’ economic hit to sales tax revenues alone will cause real pain.
Moreover, to stimulate the economy and save small businesses, Newsom has proposed to eliminate up to $50,000 in sales tax receipts for each business so that the state will not collect the tax and the business can pocket those receipts. That may help business but the state budget will take an even deeper hit.
Another pain will be felt in corporate taxes which generates 11% of the total of state funds received. Newsom expects California to collect $16 billion in the 2020-21 state budget. That number will be going south as corporate taxes are based on corporate income which isn’t looking too bright.
Yes, the 2020-21 budget is going to hurt all sectors of government, but the pain will extend into the 2021-22 budget. Even if the economy rebounds quite nicely in the next few months, the largest revenue in the state budget is income tax receipts from the top 1% of income tax payers. They account for 47% of all of the state income tax receipts. The top 1% in this coronavirus outbreak will take a fiscal gut punch, especially in the arena of capital gains, and will take huge write-offs in capital gains so as to offset income.
The state budget, unfortunately, is much too reliant on income tax and, especially, on capital gains. Newsom projected in January income tax revenues of $103 billion, which accounts for 67% of all state revenue. Because of the rising stock market over the past decade, capital gains payments to the state are expected to account for over $15 billion in revenue. In contrast, in the 2009 state budget during the Great Recession, Californians paid only $2.3 billion in capital gains. In perspective, that gap of $13 billion accounts for the entire cost of the state prison system.
Newsom can expect some healthy state revenue from current income tax payment to keep the 2020-21 state budget not so dire, even with the projected losses in sales tax and corporate income. As for the following year, the loss of income, especially the loss of capital gains revenues in 2020, will cause an even worse state budget outlook for next year.
During the tough times, Thomas Paine’s words during the American Revolution still resonate today and should be Gov. Newsom’s new mantra: “These are the times that try men’s souls.”
Good luck governor! You are certainly earning your keep these days.
Terry McAteer is a member of The Union Editorial Board. His views are his own and do not represent the views of The Union or its editorial board members. Contact him at email@example.com.
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