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$31 billion surplus projected for California

The nonpartisan California Legislative Analyst's Office credits a broad-based increase in tax revenues up and down the income strata for the Golden State's windfall.

(CN) — California could be flush with cash going into the new year thanks to a projected $31 billion surplus spurred by unprecedented growth in the stock market coupled with increased consumer spending and windfalls from the federal stimulus, the California Legislative Analyst’s Office said during a Wednesday press conference. 

The stock market essentially doubled from lows seen in March 2020 when the first wave of Covid-19 hit the United States and economic uncertainty dominated helped goose revenues that made the surplus possible according to Gabe Petek, the state legislative analyst, on Wednesday. But the increase in revenues was also broad-based throughout the economy, coming from high-income earners and “uncommonly strong” amounts of income, corporate and sales taxes. 

“You never can say for sure when these trends will moderate, but we do see a settling down from these torrid growth rates,” Petek said. 

Brian Uhler, another analyst, said high-income earners in California remain a major part of the tax revenue story. 

“Investments in tech startups in the Bay Area have intensified, so that remains part of the story,” he said. “But what makes this surge more broad-based is the sales tax side, where retail spending has grown double digits this year. It’s really been an unprecedented growthy in retail spending.”

This surge has helped California’s budget picture but has also driven inflation as demand for goods, not services, outpaces supply, particularly as consumers have emerged from the pandemic with more savings to beef up their discretionary income. 

Petek said the current budget estimates are not overly affected by the American Rescue Fund and the CARES Act, as those federal funds have already been spent and will not likely factor into the budget cycle on an ongoing basis 

But Uhler said the stimulus funds gave California consumers some spending power and that is certainly “part of the story.”

The analysts said the recently passed bipartisan infrastructure bill did not factor into the current budget outlook, nor is there anything related to President Joe Biden’s Build Back Better plan which could inject additional federal dollars into the state economy. 

“Those could have positive effects on the national and state economy, but as to the extent of that we can’t give specifics,” Uhler said. 

State Senate President Toni Atkins, D-San Diego, said the windfall projected by the analysts is a result of careful fiscal management on behalf of governor and lawmakers in Sacramento. 

“California’s strong fiscal health is not an accident,” Atkins said in a statement. “It is the direct result of a decade of responsible budgeting by Democratic legislators and governors that enabled the state to survive the pandemic downturn, the direct result of a rebounding economy, and the direct result of our common-sense, voter-approved revenue system where everyone contributes, but those that benefit the most from California’s economy contribute their share to help meet the needs of all Californians.”

Petek also noted the surplus, while generally positive news, will force tough decisions on the Legislature. The California Constitution dictates that if tax revenues exceed certain appropriations limits, the Legislature must either provide tax rebates, cut taxes or send the money to schools — or a combination of all three. 

“Early action by the Legislature should be considered,” said Petek. “There’s a lot on the table for the Legislature to have to be dealing with come May.”

Republican Assembly member Marie Waldron said ordinary Californians should benefit from either rebates or tax cuts. 

“There’s something wrong when the state is flush with extra cash 0151 $750 for every man, woman and child 0151 while ordinary people have to choose between putting food on the table and filling their gas tank,” the Escondido Republican said in a statement. “If California won’t give this money back, let’s at least spend it in a way that brings down the cost of living and improves people’s quality of life."

The option to send the surplus to schools could be complicated by declining enrollment across the state, meaning less need for allocations. 

“We’ve seen declining enrollment for the last decade,” said Egard Cabral, a analyst with the Legislative Analyst's Office who focuses on K-12 education. “But the magnitude has really increased in the last year.”

Cabral said school districts are saying that many parents, particularly parents of kindergarteners, are keeping their children at home during the pandemic. 

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