California should halt its boom-and-bust budgeting and boost reserves instead

Five gubernatorial candidates met at a recent debate hosted by a coalition of groups called Jewish California. How should the state confront its structural budget deficits, the candidates were asked. Should California raise taxes or do a better job with money the state already takes in?

Eric Swalwell and Tom Steyer favored higher taxes. Matt Mahan, Steve Hilton, and Antonio Villaraigosa argued for better performance from revenues the state already has. 

Despite their answers, California’s course could be set before the next governor takes office.

The Legislative Analyst’s Office projects persistent structural budget deficits for California — $18 billion in fiscal 2026–27 and up to $35 billion in 2027–28 and beyond. 

How Gov. Gavin Newsom and the Legislature address that gap will set the course for years. And how voters decide some November ballot measures, including a proposed wealth tax, could further bind the next governor.

Fiscal discipline marked the Jerry Brown years, at least until he helped “temporarily” make California the state with the highest marginal income tax rate in 2012. A lot has happened since that no governor could anticipate: catastrophic wildfires, a global pandemic, cascading housing and homelessness crises, among others. 

Over the past seven years, California’s general fund expenditures have risen about 66%. Inflation explains only about a third of that.  Also the number of state employees per resident is up 19%, while the state’s net population has fallen by 450,000 people. 

In total, 1.8 million Californians have left the state, partially offset by immigrant growth and births. Between 2018 and 2022, about 57,000 high-net-worth individuals left, taking roughly $1.1 trillion in personal wealth with them. 

The message is clear. California has a spending problem, and taxpayers are getting a miserable return.

California has the highest unemployment rate in America,  the lowest affordability in the continental United States, declining homeownership, median housing prices at twice the national average, $23 billion spent on homelessness as the houseless population rose 40%, and infrastructure that is near the bottom of national rankings.

The root causes include chronic budget volatility, weak fiscal discipline, poor accountability and a woefully inefficient government. Employers also cite taxes, regulation and bureaucracy as reasons to invest elsewhere, feeding the weak job market.

We can’t boil the ocean, so let’s address the first two issues — budget volatility and  fiscal discipline.

California’s tax structure depends disproportionately on high-income earners and capital gains, making revenue acutely sensitive to market swings. In boom times, Sacramento treats windfalls as permanent. In lean years, it scrambles to cut services or raise taxes. 

Consider the administration’s $165 billion revenue overestimate in 2022. It produced what appeared to be a $98 billion surplus and set off spending commitments. But the surplus was imaginary; the spending was not.

The Legislative Analyst’s Office has proposed a sensible correction: build much larger reserves into the budget. Current law caps reserves at 10% of general fund tax revenues — far too low for a state as volatile as California. Under present policy, reserves would cover only about a third of projected shortfalls.

Raise the cap to 50% and the state could cover closer to three-quarters. The idea is to build toward that level over several budget cycles, improving stability without crowding out vital programs.

That reform would also create a tax revenue “norm” based on a 20-year extrapolation. Revenues above the norm would be treated as windfalls and deposited into reserves; revenues below it would mark shortfall years, when those reserves could be used.

This fix would require the Legislature to place a measure on the ballot. On a question so important to the state’s future, that is exactly the right answer.

Fiscal discipline is not austerity; it is accountability. It means insisting that every dollar produce genuine value for taxpayers. 

California does not need a bigger government. It needs a better one.