California Democrats at odds over how to close growing budget deficit

California’s tax revenues continue to fall short of expectations, its deficit continues to grow and with the June 15 deadline for enacting a new budget, there’s a three-way split among the Capitol’s top Democrats.

In January, Gov. Gavin Newsom declared that the state had a $22.5 billion deficit, just months after bragging about a nearly $100 billion surplus. However, revenues – particularly personal income taxes – have grown even softer since then. When Newsom unveils a revised 2023-24 budget later this month, he’s expected to declare a wider income/outgo gap.

The problem is exacerbated by two factors: the spending expectations that were raised by last year’s phantom surplus and the lack of revenue clarity because the deadline for filing income tax returns, originally April 18, was extended by six months due to winter storms.

The current budget, passed when surplus projections were soaring, contains dozens of appropriations to create new projects or services, or to expand existing ones, particularly in social welfare and health care fields. The cornucopia of cash pleased advocates for those services, but they were disappointed in January when Newsom proposed to claw back many allocations to close the newly discovered deficit.

Since then, budget stakeholders have been pressing the Legislature not only to resist Newsom’s cuts but increase spending even more. Some of the heaviest pressure is coming from hospitals and mass transit systems, both of which say they face financial collapse if they don’t get billions of dollars from the state.

Last week, state Senate leaders issued their budget plan, entitled “Protect Our Progress,” that, they said, would close the state’s deficit while maintaining last year’s new spending – principally by borrowing money from the state’s stash of uncommitted cash and raising corporate income taxes by more than $7 billion.

“We are, in effect, getting our biggest corporations closer to pay their fair share,” said Sen. Nancy Skinner, an East Bay Democrat who chairs the Senate budget committee.

Spending advocates immediately issued statements of praise for the Senate’s budget framework.

“Senate Democrats’ plan acknowledges that California’s projected budget shortfall will never be solved by putting more burden on those who are struggling, but by asking California corporations to chip in more of their vast wealth – created by working people – to create a stronger economy and deliver on our state’s shared commitment to equity,” Tia Orr of the Service Employees International Union said in one of many supportive statements.

However, business groups denounced the proposed corporate tax increase. “Now is not the time to test California’s ability to withstand the impact of an economic downturn or a recession by placing our economic success at risk,” said Jennifer Barrera, president of the California Chamber of Commerce.

More importantly, Newsom immediately rejected the tax increase. “Governor Newsom cannot support the new tax increases and massive ongoing spending proposed by the Senate today,” spokesperson Anthony York said in a statement. “It would be irresponsible to jeopardize the progress we’ve all made together over the last decade to protect the most vulnerable while putting our state on sound fiscal footing.”

Significantly, the Senate’s plan didn’t have an endorsement from Assembly leaders. In January, Assembly Speaker Anthony Rendon, a Democrat from Lakewood, said he would prefer to tap the state’s “rainy day” reserves if the deficit widened.

“That’s what it’s there for,” Rendon told POLITICO.

So what’s it going to be? Deeper spending cuts? New taxes? Dipping into the reserves?

Whatever they do, Newsom and legislators will be shooting in the dark. They missed badly last year when the supposed surplus turned to dust, and the state’s fiscal picture is even cloudier this year.