Gov. Gavin Newsom on Friday released his $307 billion May budget revision and the news is grim. The state is facing a $31.5 billion shortfall — $9 billion higher than the governor had predicted when he unveiled his budget in January. Obviously, this means that Newsom and the Legislature will need to roll make some tough choices before the June budget deadline.
The governor’s latest proposal is a mixed bag. Let’s start with the most encouraging news. Newsom rejected a proposal by Senate Democrats to raise taxes on large corporations — an idea that would only exacerbate California’s budget woes. That plan would raise corporate taxes on income above $1.5 million by 2 percentage points.
Yet California businesses already are struggling and many of them are scaling back operations. The top 1% of earners pay nearly 50% of state income taxes, which leads to the boom-and-bust cycles whereby officials boost spending programs and then pare them back during downturns.
The last two budget cycles call attention to this dilemma. Last year, the state enjoyed an unfathomable $97.5-billion budget surplus on the heels of a tech-driven boom. Bay Area tech companies now are laying off thousands of workers and the economy heads toward a recession. We’re still frustrated that lawmakers didn’t use the surplus to put the state on a firmer footing.
Fortunately, the administration is paring back some of its most aggressive spending plans, including a plan to spend $54 billion over the next five years for various climate-change proposals. Also encouraging: Newsom remains firmly opposed to tapping the state’s rainy day fund — money that’s needed if a recession takes hold.
We’re also pleased that Newsom is resisting calls to bail out struggling transit agencies, despite complaints from Assembly Speaker Anthony Rendon, D-Los Angeles, who argued that “public transit is the vanguard of Californian’s fight against climate change.” But transit ridership hasn’t fully recovered since the pandemic for reasons that have nothing to do with funding. Transit systems need to improve their operation rather than seek bailouts.
On the bad side, Newsom also is committed to staying the course on ramped up spending for a host of social-spending programs. To continue on that path, the governor is proposing various budget gimmicks that, as the Mercury News reported, largely shift general-fund spending to other sources — such as tapping special funds such as the Greenhouse Gas Reduction Fund.
The governor also wants to rely on state bonds. Such bonds don’t directly raise taxes, but they tie the hands of future legislatures. They are meant for capital investments, not everyday spending. If a program is important, the state should fund it on a pay-as-you go basis. But that would require tough choices that lawmakers have been reluctant to make.
Because or their small minority, California Republicans have no leverage in budget negotiations. The GOP calls the deficit a “wakeup call to all Democrats that after years of increased spending, they should have better results to point to than an outrageous cost of living, surging crime, rampant homelessness, a fentanyl crisis, failing schools and inadequate water storage.” They have a point.
Although the governor’s plan avoids the worst pitfalls, it represents more business as usual — and that means a continued focus on maintaining spending rather than actually fix major problems.
