California Sees Record $97.5 Billion Surplus, Driven by the Rich
(Bloomberg) -- California Gov. Gavin Newsom said Friday his state has a record operating surplus of $97.5 billion as high tax rates for its wealthiest residents mean he has more money to pursue liberal priorities like to fund education and health care.
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The surplus is larger than the 2020 spending of all other states except New York and Texas. Of this windfall, lawmakers can tap into $49.2 billion for any purpose. That number surpasses the staggering $38 billion they had at their disposal during the last fiscal season, which was considered the largest at the time.
The surplus is "simply unprecedented," said Newsom, a first-term Democrat who is up for re-election this year, as he unveiled a $227.4 billion budget for the next fiscal year beginning in July.
While billionaires like Elon Musk have scoffed at California's high taxes as they migrate to low-tax states like Texas, the progressive tax system yields more revenue as incomes rise for its wealthiest residents. This group has benefited from rising stock prices and stable employment, although many lower-income workers have lost their jobs during the pandemic. For capital gains realization alone, California expects a record $291 billion in 2021, according to budget documents.
"It's a sign of how well a number of people are doing in this economy," Newsom said. "I am proud of California's progressive tax system and we are the beneficiaries of it."
This one-sided tax structure, with the top 1% of income earners paying nearly half of personal income tax receipts, also prepares the state for revenue declines sharply in an economic downturn. In fact, capital gains as a percentage of personal income collections are at levels last seen just before the dot-com bust.
Newsom said he was "deeply aware of the prospects of a slowdown." More than 90% of the surplus would go to one-off expenses, he said. Reserves, including the deposits required by the Constitution, total $37.1 billion.
Newsom's spending plan also allocates billions of dollars to provide checks to residents to help offset rising costs, subsidize health care and strengthen the state's energy grid, and take action on climate change.
Newsom also proposes prepaying $3.5 billion in bonds — an idea proposed by Wall Street — and using cash rather than selling debt to fund some investment projects.
While Democrats hold supermajorities in both chambers, their priorities at times diverge from Newsom's. Lawmakers last month declined to respond to the governor's request to postpone an annual inflation-indexed fuel tax hike scheduled for June, saying they see "gotchas" in the temporary move.
Lawmakers have until June 15 to approve a budget or waive pay.
Newsom's spending plans include:
$11.5 billion for each eligible registered vehicle owner, limited to two $400 checks per person
$2.7 billion for emergency rental assistance
$2 billion for affordable housing
$1.4 billion in overdue utility bills
$933 million for hospital and nursing home workers
$750 million for free public transit
$125 million to improve access to reproductive health services
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