Newsom’s budgets fall short on tax revenues

A review of recent state budgets and Gov. Gavin Newsom’s newly released 2024-25 budget proposal reveals truly monumental errors in revenue estimates by his fiscal advisors, particularly personal income taxes.

The stark differences between estimates and reality, if continued, will affect the state budget’s solvency for at least the remaining years of Newsom’s governorship.

Newsom’s latest budget acknowledges that income taxes, which are mostly paid by those in upper income brackets, are $44 billion less than previously projected for the three-year “budget window” from 2022-23 through 2024-25. But the shortfall is actually billions of dollars more.

When Newsom and the Legislature enacted a 2022-23 budget in June 2022, it assumed that income taxes would bring in $129 billion. Later, that projection dropped to $122.8 billion and Newsom’s latest budget set it even lower at $101.8 billion, as state officials close the books on that fiscal year.

The 2023-24 budget adopted last year projected $118.2 billion in income tax revenues, but it’s since been revised to $113.8 billion. And Newsom’s newest budget assumes that income taxes will bring in $114.7 billion for the fiscal year 2024-25, a $4 billion drop from last year’s assumption.

Over the three-year period, Newsom pegs the revenue shortfall at $44 billion, but it’s more likely $51 billion if one begins with the original numbers from 2022-23 — when Newsom famously bragged about the state’s having a $98 billion surplus. “No other state in American history has ever experienced a surplus as large as this,” Newsom said as he unveiled a $300-plus billion budget that the Legislature eagerly adopted with a few tweaks.

Newsom’s budget for 2024-25 assumes that the freefall in income tax receipts will end and revenues will actually pick up a bit next year. However, the Legislature’s budget analyst, Gabe Petek sees continued revenue weakness and pegs the three-year shortfall at $58 billion. Their differing projections are the main reason their estimates of the overall budget deficit are $30 billion apart. Although Newsom’s budget was unveiled just two weeks ago, income taxes — the largest single source of state revenue — are already falling behind. So far in January they are running $3 billion behind the new budget’s assumption.

This is no small matter. Newsom will revise his budget in May, and he and the Legislature will enact a budget in June that will be based on a revenue figure of some kind. Legislators will be tempted to adopt a rosy figure from Newsom rather than Petek’s lower number to minimize how much spending must be reduced to close the gap. It will particularly affect state support for K-12 schools, the state’s largest single budget obligation, which is largely determined by a revenue-based formula.

However, if the Legislature does go for a higher revenue number, as it has it years past, and it proves to be as off the mark as other recent estimates have been, the effect will be traumatic for programs that depend on state financing. Newsom blames the seven-month delay in the deadline for filing 2022 income tax returns, from April 2023 to November, for masking the sharp drop in revenue, and that contributed to the huge disparity. However, he and the Legislature could — and should — have been much more conservative in their guesswork.