California’s inequality drives budget windfall
California’s budget is benefiting from the disproportionate impact of the coronavirus outbreak that’s thrown lowerincome employees out of work and onto the streets while highly paid residents who can work remotely are snapping up new homes to ride out the pandemic.
The state, with its progressive tax system that rakes in more revenue when the income of the highest earners rises, expects to collect a record amount from capital gains as wealthy residents reap the rewards of a booming stock market. California has taken in more in salestax receipts year to date than it did over the same period last year as people shop online for everything from groceries to $275 pajamas.
California’s reliance on the
fortunes of the rich, which led to multibillion-dollar deficits in the past, is allowing it to now project a $15 billion surplus after officials had previously girded for a $54 billion two-year shortfall. As COVID-19 infected more than 3 million people and killed almost 35,000 in California, officials there, as in other states now scaling back their initial dire forecasts, failed to estimate the extent of the success of the top 1% amid the pandemic.
“Everything is pointed up for the state of California right now,” said Jennifer Johnston, director of research for Franklin Templeton Fixed Income’s municipal bond team. “This recessionary period has not impacted high wealth earners. And the state is highly reliant on them for cash revenue. They’re generally still employed, they haven’t seen the layoffs like we’ve seen among low income.”
California, which levies a top rate of 13.3% on income, is home to more billionaires than any other U.S. state, according to the Bloomberg Billionaires Index ranking of the world’s wealthiest 500 people. Nearly half of the state’s personal income tax collections come from the top 1% of earners.
Meanwhile, nearly half a million leisure and hospitality jobs in California have been lost year to date, while the typically higher-paying financial activities sector added 4,300 positions over the same period, another sign of the uneven recovery. A survey released in December from the Public Policy Institute of California showed that about 40% of households with annual incomes of under $40,000 reduced work hours or pay in the last 12 months, with a similar share forced to cut back on food.
The state’s finances are likely to be buttressed even more as the new Biden administration pushes a $1.9 trillion COVID relief package that could send more federal aid to the Golden State. That could allow Gov. Gavin Newsom and lawmakers to redirect state tax money toward those most in need.