This fiscal crisis is likely to compel the Democrat-led state administration to implement spending cuts, even as a significant number of individuals and businesses continue to relocate to states governed by Republicans.
The non-partisan Legislative Analyst's Office (LAO) of California, in a report published on Thursday, revealed that the state's budget deficit has surged dramatically within a few months. The deficit, which stood at $14.3 billion in June, has now escalated to over $54 billion. Although this is not the largest deficit the state has faced in terms of the percentage of overall spending, it is indeed the highest in real dollar terms.
The LAO report did not specifically mention the billions in tax revenue that California has lost due to the exodus of its residents and businesses. However, it did attribute the massive deficit increase and lower revenues to a shift in the state's tax filing deadline and economic conditions that were worse than anticipated.
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Data from the IRS, as reported by CNBC in May, indicates that California lost $29 billion in tax revenue in 2021, following a loss of $18 billion in the previous year.
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To address the escalating deficit, the LAO recommended that the state utilize its $24 billion in cash reserves and cut spending on schools and community colleges. The report also suggested implementing one-time spending cuts and shifting costs without affecting core services. However, it cautioned that these measures should be undertaken judiciously, as the cash reserves would likely be inadequate to cover what it identified as California's multi-year average deficits of $30 billion.
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The report further proposed that a long-term solution would involve either increasing revenue, reducing more spending, or a combination of both.
In 2020, California experienced its first-ever population decline, a trend that was exacerbated by stringent lockdowns imposed during the COVID-19 pandemic. Between January 2020 and July 2022, the state lost over half a million residents, with the number of people leaving exceeding those moving in by almost 700,000.
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Erin Mellon, the Communications Director for California's Democrat Governor Gavin Newsom, told Fox News Digital that the governor "has maintained strict fiscal responsibility since taking office." She added that this included maximizing the state's reserves as per its constitution and reducing debt.
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Mellon explained that "Federal delays in tax collection forced California to pass a budget based on projections instead of actual tax receipts." She stated that the state now needs to address last year's problem in this year's budget, given the clearer picture of its finances.
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She concluded by saying that "In January, the Governor will introduce a balanced budget proposal that addresses our challenges, protects vital services and public safety, and brings increased focus on how the state’s investments are being implemented, while ensuring accountability and judicious use of taxpayer money."
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