Days after a less-than-disastrous midterm, an unpopular President Joe Biden announced that he intends to run for reelection in 2024. Democrats face a weak and aged bench — though one Democrat who might play Ted Kennedy to Biden’s Jimmy Carter, California Gov. Gavin Newsom, just saw his narrow path to the White House become even more difficult to navigate as California’s legislative analyst announced that the Golden State was facing a $25 billion budget deficit.
Now Newsom will be forced to stay close to California and deal with a budget mess largely of his own making.
How did California, the progressive left’s shining North Star, experience such a rapid budgetary collapse when just a few months ago liberals were crowing about the state’s robust finances — typically conflating this year’s $100 billion surplus with the health of California’s economy?
There are three main causes for California’s fiscal distress.
Reliant on Taxing Big Earners
First, California has a massive overreliance on high-income earners and corporate startups. For more than a decade, California has had America’s highest marginal income tax rate, 13.3 percent. This means that when Silicon Valley does well, California’s revenue surges, raking in billions of dollars from the value of stock options, initial public offerings, and capital gains. But the reverse is true as well — when California’s economy slows, even slightly, revenue plummets. Thus, with Lyft, Meta, Twitter, and others laying off thousands, California’s tax revenue suffers. It all makes for a very volatile revenue stream.
The problem with the big ups and downs in revenue is that Democrats in Sacramento rapidly ramp up spending in the good times, and then, loath to cut spending, rack up deficits in the slow times.
Massive Regulatory Burden
Second, California’s high taxes (only New York, Connecticut, Hawaii, and Vermont have a greater state and local tax burden), heavy regulatory burden (second-worst in the nation), and bad lawsuit climate (third-worst) make the state hard on business, especially on entrepreneurs who can’t absorb the increasingly high costs of regulatory compliance. Add to that the state’s high cost of living (the third-highest behind Hawaii and Massachusetts), rampant homelessness, the highest poverty rate in the nation since 2009 (when accounting for the cost of living), and the highest electricity prices in the continental U.S., and California becomes even less attractive. In addition, California, as with other blue states and cities, responded to Covid-19 by trying to emulate China — opting for extensive shutdowns of businesses and schools.
If all those negatives aren’t difficult enough to deal with, the state’s aggressive cancel culture has added a layer of repression, forcing people with unpopular opinions to be quiet or risk harassment. As a result, many just decide to move out, taking their taxable income and businesses with them.
Increased Medicaid Costs
Third, California has gone all-in on Medicaid expansion (called Medi-Cal). In 2005, my first year on the Budget Committee and the Revenue and Taxation Committee in the California State Assembly, Medi-Cal absorbed 14 percent of the state’s $90 billion general fund budget. Back then, it covered 6.5 million people (though not very well) at the cost of $13 billion to the state general fund. Patients would frequently wait six months to a year to get treatment, and doctors were among the least compensated for their services in the nation.
The advent of the Affordable Care Act, aka Obamacare, in 2010 gave states the choice to greatly expand a bad federal program with the federal government mostly picking up the tab in the early years — and California took the bait. In the 2022-23 budget California is projected to spend $34.9 billion in state funds for Medi-Cal with the federal government and a modest amount of supplemental revenue bringing in another $98 billion. State spending on the program will jump 30 percent, or $8 billion, from the year before — an increase of about one-third of California’s expected $25 billion deficit.
Inflation-adjusted per capita Medi-Cal expenses covered by the state have more than doubled in 17 years.
Obamacare was designed to hook states into expanding government health coverage by providing generous federal subsidies in the early years that would then be pulled back, leaving states to fund a greater share of the program’s costs. Covid-19 saw additional federal funds sent to the states to cover their Medicaid expenses with the declaration of a public health emergency. These additional subsidies are drawing to a close, with California’s budget analysts calculating that the end of the public health emergency would cost the state about $450 million per quarter.
Inflation and Recession Too
To add two additional miseries to the California budget, the official fiscal outlook did not fully account for the effects of Bidenflation nor for the likelihood of a recession — California famously suffers deeper recessions than does the rest of the nation. Should a recession occur, California budget estimators calculate that revenue could dip by an additional $30 to $50 billion, pushing the deficit as high as $75 billion. Further, while some programs have automatic inflation adjustments, much of the budget doesn’t — leading the analysts to note that, “Consequently, our estimate of a $25 billion budget problem understates the actual budget problem in inflation adjusted terms. That is, assuming the Legislature wanted to maintain its current level of services, additional spending would be necessary.”
The bottom line is that California’s perennial budget woes are back in full force — at exactly the wrong time for Newsom’s presidential ambitions. And since states, unlike the federal government, must balance their budgets every year, California’s supermajority Democratic legislature will be forced to increase taxes, make painful cuts to spending, or both.
102 total views, 1 views today