Flush with tax revenue from tech executives and other wealthy citizens, California’s budget surplus is expected to reach nearly $100bn, providing an election-year boon to the state’s Democratic governor, Gavin Newsom.
Newsom, who campaigned four years ago as the leader of a national resistance to then-president Donald Trump, declared on Friday that the surplus was “simply without precedent”. Newsom vowed to use the windfall to tackle climate change, address chronic homelessness and expand healthcare in a $300bn budget proposal that he said reflected California’s “unshakeable values”.
Despite the human and economic toll the Covid-19 outbreak has taken on the state, this marks the third consecutive year of unexpected windfalls for California as its technology, logistics and finance industries have thrived, said Loren Kaye, president of the California Foundation for Commerce and Education.
“It’s pretty unbelievable, the momentum and persistence of the recovery” in California, he said.
California’s projected surplus is higher than the total spending of every US state except for New York and Texas. Much of its extra revenue is thanks to a 13.3 per cent tax on capital gains, meaning state coffers have swelled along with booming stock and property markets. The top 1 per cent of California taxpayers pay about half of the state’s personal income tax.
“It’s a sign of what’s happening . . . across this nation and around the world, a concentration of wealth and success in the hands of a few that are enjoying abundance in historic and unprecedented ways,” Newsom said.
But with inflation and interest rates rising and stock markets declining, the state’s progressive taxation system leaves it vulnerable to shocks, economists say.
“Recessions happen,” says Lee Ohanian, an economics professor at UCLA. “The California budget is hard-wired to implode in a recession and explode when stock markets are skyrocketing.”
However, Newsom says he has built safeguards into the budget with $37bn in reserves, including $23.3bn for the state’s Rainy Day Fund.
The surplus comes amid intensifying concerns among economists about a loss of competitiveness in the state. California has experienced an exodus of businesses in recent years, and prominent entrepreneurs such as Elon Musk have complained loudly about high taxes and regulations in the state.
Tesla, Oracle, Palantir and Hewlett Packard Enterprise are among the companies that have moved their headquarters out of California. Texas, with its low tax rate and hands-off regulations, has attracted a number of businesses from California.
It is not just businesses that are leaving; enough citizens have left the state that it lost a seat in the House of Representatives. Kaye blames the high cost of living in California.
“We have a competitiveness problem, but I would say it is frankly more with individual Californians . . . who are unable to make a future here due to the high cost of living,” Kaye says.
“We’re losing a cohort of Californians who are middle-income, middle-skilled people who can’t afford to buy a house here, can’t afford to rent here and can’t afford to live in areas with good schools.”
Newsom’s budget does little to directly address such long-term concerns. Instead the governor is proposing $18bn in inflation relief in which millions of California’s car owners would receive $400 cheques to offset high fuel prices. About $4bn would go to low-income people struggling to pay utilities or rent. Small businesses would also see some tax relief.
The refunds and stimulus cheques are likely to be popular with voters coping with rising costs. Newsom, who faced down an effort to recall him from office last year, so far does not seem to face a formidable challenger in the autumn election. As in his first run, he is positioning himself as the leader of a haven state for progressives across the US.
With the US constitutional right to legal abortion under threat from an expected Supreme Court decision, Newsom is seeking to position California as a sanctuary state for women seeking to have the procedure. His budget proposes $125mn that could provide services to women travelling to California from states where abortion is illegal.
The move is likely to be popular in solidly Democratic California, which has not elected a Republican to statewide office since 2006.
“While gridlock persists in Congress and rightwing fanatics turn statehouses across the country into laboratories of hate and oppression, here in California, we’re putting in the work to grow our economy and implement real, inclusive policy change to create a brighter future for all,” Newsom said in a statement.
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