Recently, a witness at one of California’s reparations hearings demanded “where’s the money?” Gov. Gavin Newsom’s announcement that the state miscalculated its deficit by $10 billion seems to answer that question. As his reparations Task Force demands as much as $1.2 million per eligible black resident, Newsom recently balked at cash payments. After years of using reparations as a political issue and insisting that such payments are a moral imperative, many are pushing back that this bill is now due. A card will just not do.
The new figure puts California’s debt at a towering $32 billion.
There are various contributors to the shortfall including a progressive tax system that makes revenues dependent on the income of wealthy taxpayers. When the stock market falls, revenues fall. There is also the mass exodus from the state of higher income citizens. Some are fed up with rising crime and taxes. It does not help when California publicly debates not just massive reparations payments but retroactive taxes for those who leave the state.
There are also now mass tech layoffs and a building recession.
Newsom expressed confidence that the state could handle the deficit and that is likely true. The state has a massive budget of $306 billion and he is looking at cuts. He has already scaled back funding for climate proposals to $48 billion, from $54 billion.
He also has a net reserve. However, just a year ago, Newsom was publicly celebrating a claimed budget surplus of $97 billion and said it was “simply without precedent.”
This year, Newsom admitted that the state would face a deficit of $22.5 billion, which he called “modest shortfall.”
Democrats are now calling for increasing taxes on large corporations and suspending a major business tax credit to raise new funds. Newsom is opposing those proposals.
The budget shortfall is massive, but so is California’s economy. The state also has a reported reserve fund, though this deficit would largely wipe out that fund of $37 billion and Newsom has vowed not to touch it.
The immediate political question is whether, after years of politicking on the issue, residents will be willing to take an IOU or non-cash “reforms” in lieu of reparation payments.
The longer term question is how to reverse the exodus of high-income citizens who are tired of rising tax and crime rates. While some in the media have pushed back by saying that the state has more people moving in than out, California and New York are losing higher earners who pay most of the taxes. Much of the difference is made up in foreign immigration.
I have always loved California where I spent much of my youth due to my grandparents living in Cherry Valley (near Riverside). I love the hiking and beautiful coasts. I believe that the state has the resources to pull out of this crisis, but I am increasingly concerned about the trajectory of the state. Across the board, California has the highest taxes in areas like gasoline and other necessities. At the same time, while Democrats continue to insist that the wealthy do not “pay their fair share,” the top 5 percent of high-income taxpayers in California pay 70 percent of personal income tax revenue.
Nationally, the top one percent of taxpayers pay 42 percent of all taxes.
That is why the exodus could prove a cascading problem for California. While Newsom has run ads attacking Florida, that state is exploding in population, including many high-income households.