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California’s budget basics
According to the National Association of State Budget Officers (NASBO), California’s total expenditures in fiscal year (FY) 2020 were $337.7 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2020 were $2.3 trillion, ranging from $4.7 billion in Wyoming to $337.7 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 $492.6 billion in FY 2018 (the most recent year census data were available), or $12,484 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 $9,801.
California’s largest spending areas per capita were public welfare ($3,336) and elementary and secondary education ($2,297). 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 $499.5 billion in FY 2018, or $12,657 per capita. National per capita general revenues were $10,071. California uses all major state and local taxes. After federal transfers, California’s largest sources of per capita revenue were individual income taxes ($2,411) and charges ($2,306), such as state university tuition and highway tolls.
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 (60 Democrats to 19 Republicans and 1 independent) and Senate (30 Democrats to 9 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 2022 because members serve two-year terms. Senators serve four-year terms; roughly half the senatorial seats are on the ballot in 2022, and the other half will be up for election in 2024.
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 Newsom released his FY 2021 budget proposal in January 2020. The proposal included $153 billion in general fund spending, a 2 percent increase over FY 2020 spending. The governor prioritized strengthening state reserves, increasing spending on K-12 education, and addressing healthcare and housing affordability.
California enacted its FY 2021 budget in June 2020. The enacted budget allocated $134 billion in general fund spending, a 9 percent decline from FY 2020 and $19 billion less than the governor originally proposed in January. The enacted budget included roughly $9 billion from the state’s reserves, about $11 billion in spending cuts and deferrals, and $4 billion in business tax increases (through temporary changes to its treatment of net operating losses). However, as California’s finances improved over the year, the state was able to avoid budget cuts, and ultimately (according to the governor’s new budget proposal), the state’s actual general-fund spending will be closer to $156 billion, which is more than Governor Newsom originally proposed.
Governor Newsom released his FY 2022 budget proposal in January 2021 and gave his State of the State address in March. The governor’s proposal includes $165 billion in general-fund spending and $227 billion in total spending. California’s unique tax situation (being a high-income state with a very progressive income tax) allowed the governor to propose spending well above last year’s prepandemic plan. Separate from the budget, the governor and legislature passed a $7.6 billion pandemic relief bill in February. Among other provisions, the legislation includes $2 billion in grants for small businesses and $600 checks for some residents. To qualify for the checks, California residents must either (a) claim the California earned income tax credit (EITC) or (b) file their tax return with Individual Taxpayer Identification Numbers (ITINs) and have household income below $75,000. So far, the federal stimulus checks have excluded ITIN filers (i.e., undocumented immigrants) from direct payments, although the December federal relief package did allow mixed immigration-status families to family members with Social Security numbers to receive the relief payments. Further, ITIN filers who are newly eligible for California’s EITC are eligible for both checks and thus could collect $1,200 (ITIN filers are not eligible for the federal EITC but California passed a law in 2020 making them eligible for the California EITC).
For more on California’s budget, see
California’s economic trends
California’s per capita income (per the Bureau of Economic Analysis) was $71,480 in 2020, ranking fifth among the states. It was above both the national average of $59,729 and the Far West regional average of $68,603. The state’s median household income (five-year estimate) was $75,235 in 2019, ranking eighth among the states and above the national average of $62,843. California’s poverty rate was 13.4 percent in 2019 (five-year estimate), equal to the national rate of 13.4 percent.
Although California’s averages tell a story about the entire state, California is composed of diverse localities. For example, the city of Desert Hot Springs’s median household income was $33,046, and its poverty rate was 31.1 percent; the city of Los Altos’s median household income was $235,278, and its poverty rate was 2.8 percent.
California’s unemployment rate has historically been above the national average, particularly following the Great Recession. In recent years, California’s unemployment rate has been among the highest in the country. (See how COVID-19 is affecting state employment and earnings data.)
Unemployment rates (like other economic indicators) often vary significantly by race and ethnicity. In California, the average unemployment rate in 2020 was 9.9 percent for white residents, 12.2 percent for Black residents, and 11.7 percent for Latino residents.