California’s budget shortfall is expected to increase by $15 billion due to a decline in revenue

California’s budget deficit is expected to increase by 26% to $73 billion, according to the state’s budget adviser. This new projection for fiscal 2024-25 reflects a $15 billion growth from previous estimates, driven by a decline in traditional corporate tax collections, which fell by over 33% in December compared to the previous year. The Legislative Analyst’s Office (LAO) also noted weak income tax withholding and estimated payments recently.

The LAO stated in a report released Tuesday that if the budget shortfall increases by $15 billion, the Legislature will need to identify new budget solutions to maintain a balanced budget for 2024-25.

This forecast suggests that Governor Gavin Newsom may propose additional spending cuts when he presents his budget revision in May. While the governor’s current budget already includes $8.5 billion in cuts, the LAO highlighted the potential for an additional $16 billion in one-time or temporary spending decreases in its latest report.

Newsom and the LAO have disagreed on the size of the deficit, with the governor estimating it at $37.9 billion in his initial budget proposal. However, the LAO expressed skepticism about the governor’s revenue estimates, describing them as “optimistic but plausible” in a report released in January.

California’s fiscal situation is made more complex by a seven-month extension granted to individuals affected by severe winter storms in 2023 for filing income taxes. This extension has led to the state over-allocating tens of billions of dollars, primarily to schools, based on mandatory budget formulas linked to revenue forecasts that were inaccurate due in part to delayed tax payments.

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