Opinion | California Gets Another Budget Deficit Shock

The California Legislative Analyst’s Office (LAO) on Tuesday increased this year’s projected state budget shortfall to $73 billion—nearly twice as much as Gov. Gavin Newsom forecasted last month. Ouch. Mr. Newsom has ambitions to reside in Washington, D.C., and based on his deficits it looks like he’d fit right in.

Mr. Newsom projected a $38 billion budget gap last month—$20 billion less than the LAO did at the time. He’s counting on a surge in tax revenue from capital gains after the rise in stock prices in recent months.

Tech companies based in California have been among the biggest beneficiaries of the bull market. Artificial intelligence chip maker Nvidia’s stock price has increased by roughly 50% since November. The top 1% of California taxpayers pay about half of the state’s income taxes, and state revenue usually rises and falls with capital gains.

The mystery is why this isn’t happening this year. The LAO notes that tax collections in recent month have deteriorated, rather than improved. “Recent revenue collections data reflect even further weakness relative to [earlier] estimates,” the analyst notes. Corporate tax collections were a third lower in December relative to the year before.

Income tax withholding and estimated payments from capital gains have also been weak. “As California’s tech companies have grown, equity pay withholding has increased as a share of total income tax receipts,” the LAO notes. Yet despite tech stock gains that should boost the amount of tax being withheld from paychecks, it adds, “recent withholding has been underwhelming.”

Perhaps this is due in part to the underperformance of the overall state economy. California’s unemployment rate rose to 5.1% in December from 4.1% a year earlier, while the number of employed workers declined by 108,200. The U.S. jobless rate is 3.7%, and Florida’s is 3%. Sorry, Gov. Newsom.

The LAO recommends that the Legislature pull back one-time spending that hasn’t been disbursed, such as for wildfire resilience, flood control and an IT overhaul for the unemployment-benefit system from which scammers pilfered tens of billions of dollars during the pandemic. As usual, transfer payments would keep growing while important public works would be shelved.

Mr. Newsom’s budget proposal released last month rejects substantive spending cuts and relies on budget gimmicks. The big spenders in Sacramento, as much as in Washington, need a shot of fiscal Ozempic.