California’s large budget deficit looms for Gavin Newsom. Why it may be getting worse

California Gov. Gavin Newsom is likely to face a budget deficit even bigger than the $38 billion he projected during his initial spending plan presentation in January.

This means it will be tougher for the governor, who must detail his revised budget proposal — updated with the most recent tax receipts — by May 14.

That’s because the latest state tax receipts have brought in revenues below the expectations Newsom’s Department of Finance set earlier in the year. The agency’s April finance bulletin shows California’s fiscal year-to-date revenues were $5.8 billion or 4% below the $146 billion forecast as of March.

The year-to-date personal income tax receipts made up $3.4 billion of the overall shortfall, the bulletin reported. Year-to-date corporation tax receipts were $1.4 billion below forecast, and sales tax receipts were down $1 billion. The Department of Finance will not release any new budget numbers until Newsom presents his updated spending plan.

The revisions will kick off a month of budget negotiations between Newsom, Assembly Speaker Robert Rivas, D-Hollister, and Senate President Pro Tem Mike McGuire, D-Healdsburg.

The Legislature must pass the 2024-2025 budget by June 15. The new fiscal year starts July 1.

Assembly budget advisor Jason Sisney said in an April 25 post on his #CABudget Substack that Newsom’s revised budget is “virtually certain” to lower revenue projections from those he released in January.

“Will that downgrade be as significant as the Legislative Analyst’s Office (LAO) suggested in February and March?” Sisney wrote. “My personal view is: I doubt it, but that decision is now in the hands of those completing the administration’s official forecast update, due to be released on or before May 14.”

H.D. Palmer, a Department of Finance spokesman, pointed to a portion of Newsom’s January budget document acknowledging “revenue forecasting is always subject to significant uncertainty.” It suggested projections could be off, even as “the magnitude of potential revenue swings has likely declined as revenues have already come down from unsustainably high levels through 2021-22.”

“The principal drivers that could lead to higher or lower revenues include higher or lower personal income tax withholding receipts, capital gains realizations, corporate taxable profits, and use of corporate net operating losses and business incentive tax credits,” the budget document said.

Palmer declined to make projections ahead of the governor’s upcoming presentation, but he cautioned against using monthly revenue outlooks to assess the budget as a whole.

The Legislature in early April opened up previous budgets from fiscal years 2022-2023 and 2023-2024 to find $1.6 billion in funding “solutions,” including cuts, delays and other money-saving strategies.

That agreement between Newsom, Rivas and McGuire included $17.3 billion in budget fixes. A large chunk of the agreed-to changes will be implemented as leaders negotiate the budget.

Newsom and the Legislative Analyst’s Office disagree over the potential size of the state’s deficit. After the governor’s January budget presentation, the LAO in February released a deficit update that suggested the spending gap was closer to $73 billion, based on weak revenue collections.

The dueling deficit projections date back to late 2023, when the LAO estimated the state would see a $68 billion shortfall. Although the LAO and the Department of Finance typically calculate different budget numbers, Newsom railed against the bigger projection, saying it was wrong for budget-watchers to take it “as gospel.”