California

State Fiscal Briefs

October 2020

California’s budget basics

According to the National Association of State Budget Officers (NASBO), California’s total expenditures in fiscal year (FY) 2019 were $311.3 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2019 were $2.1 trillion, ranging from $4.5 billion in South Dakota to $311.3 billion in California.

Each state allocates spending and taxes differently among different levels of governments, and local governments often administer programs with state funds, so combined state and local government data show a more complete picture of individual benefits and contributions when comparing states.

Per the US Census Bureau, California’s combined state and local direct general expenditures were $455.5 billion in FY 2017 (the most recent year census data were available), or $11,560 per capita. (Census data exclude “business-like” activities such as utilities and transfers between state and local governments.) National per capita direct general expenditures were $9,446.

California’s largest spending areas per capita were public welfare ($2,840) and elementary and secondary education ($2,116). The Census Bureau includes most Medicaid spending in public welfare but also allocates some of it to public hospitals. Per capita spending is useful for state comparisons but is an incomplete metric because it doesn’t provide any information about a state’s demographics, policy decisions, administrative procedures, or residents’ choices.

California’s combined state and local general revenues were $454.0 billion in FY 2017, or $11,523 per capita. National per capita general revenues were $9,592. California uses all major state and local taxes. After federal transfers, California’s largest sources of per capita revenue were charges ($2,171), such as state university tuition and highway tolls, and individual income taxes ($2,137).

California’s politics

Governor Gavin Newsom, a Democrat, was elected in 2018 with 62 percent of the vote. The next gubernatorial election is in 2022.

Democrats control both the Assembly (61 Democrats to 19 Republicans) and Senate (29 Democrats to 10 Republicans), with veto-proof majorities in both houses. Control of the governor’s mansion and each house of the legislature gives Democrats a trifecta in California, which they have had since Newsom’s predecessor, Jerry Brown, took office in 2011. All California Assembly seats are on the ballot in 2020 because members serve two-year terms. Senators serve four-year terms; roughly half the senatorial seats are on the ballot in 2020, and the other half will be up for election in 2022.

California’s budget institutions, rules, and constraints

California uses an annual budget. The legislature must pass and the governor must sign a balanced budget, but deficits can be carried into the following year. The state does not implement any debt limits on either debt service or authorized debt.

California limits both spending and revenue growth with binding rules that require a legislative supermajority or popular vote to override them. Further, the state operates under one of the country’s most influential tax restrictions: Proposition 13. Named after its successful 1978 ballot initiative, Proposition 13

  • caps the property tax rate for all local governments at 1 percent,
  • sets a property’s assessed value at its purchase price (not its market value) and restricts annual assessment increases to 2 percent,
  • requires a two-thirds majority in both houses of the state legislature for any state tax increases, and
  • requires support from two-thirds of voters for any tax increases by local governments.

However, California can still raise state taxes via ballot initiatives, which only require majority support from voters.

(Note: Some states have informal budget institutions that constrain overall spending growth or a specific expenditure’s growth.)

California’s recent fiscal debates

  • In part because of the restrictions created by Proposition 13 on property taxes, California has the highest general sales tax rate and top individual income tax rate in the country. Both the sales tax rate (7.5 percent) and income tax rates (including the top bracket’s rate of 13.3 percent) were approved by voters in a 2012 ballot initiative. The sales tax rate increase expired and reverted to 7.25 percent in 2016 (still the highest) but voters again approved and extended (for another 12 years) the higher income tax rates in another ballot initiative in 2016. Both ballot initiatives were pushed by then Governor Jerry Brown, who argued the revenue was needed to fund schools and balance budgets. While opponents still decry the high rates, Brown left office with California enjoying a large budget surplus.
  • In 2017 California approved a large transportation bill (SB1) funded with a 12-cent increase in the state’s gas tax plus future annual rate increases tied to the state’s inflation rate. The legislation also replaced a more complicated gas tax rate calculation based on the price of gas (which had been falling and thus decreasing revenue) with a simpler per gallon rate. Opponents put Proposition 6 on the 2018 ballot, which would have repealed the tax increase and required voter approval for any future fuel tax increase. But 56 percent of voters rejected the proposition, and the gas tax increase remained.
  • Four California localities levy soda taxes—Albany, Berkeley, Oakland, and San Francisco—and some advocates have called for a statewide soda tax. However, as more localities were considering the tax, the state passed legislation SB 872 in 2018 that bans any more California localities from establishing a soda tax until 2030. Opponents of the legislation said it banned localities “from being able to take steps to protect the health of their residents.” However, even some proponents of soda taxes supported the measure because beverage companies prepared a ballot initiative that would have required two-thirds legislative support for any local government tax increase (in addition to the requirement for two-thirds voter support). When the soda tax preemption bill passed, the ballot initiative was dropped.

California’s current budget

Governor Gavin Newsom introduced his original budget in January 2019. It proposed new spending for a universal preschool program, funding for two free years of community college, and increasing the state’s earned income tax credit. Newsom then released a revised budget in May 2019 based on updated economic forecasts. The revision included over $3 billion in new revenue, but most of it was constitutionally obligated to go toward reserves, debt payments, and schools.

The legislature passed its budget in June 2019 and mostly embraced the governor’s priorities. As part of a larger tax bill, the legislature increased the state’s earned income tax credit (EITC) by $1,000 for families with at least one child younger than age six and increased the income eligibility limits for all filers. (Unlike most state EITCs, California’s EITC does not use the federal income eligibility rules.) The budget also included $300 million for full-day kindergarten and waived all fees for two years of community college. Despite this and other increases in education funding, though, many California school districts remain concerned about their finances. Further, the introduction to the budget summary stresses how a future recession would affect the state’s budget and highlights the decision to allocate $14.3 billion for unfunded liabilities, deficit payments, and budget reserves.

Governor Newsom released his proposed FY 2021 budget in January 2020 and gave his 2020 state of the state address in February 2020.

For more on California’s budget, see