When Gov. Gavin Newsom was asked to explain how the state has a record surplus one year and has to make budget cuts the next, he answered “progressive taxation.” He was referring to the way California’s tax law is structured so that wealthy residents pay far more than anybody else. In fact, the top 1% of income earners paid nearly half of all personal income taxes in 2021, according to the governor’s recent budget proposal.

And the state relies heavily on capital gains — the profit a person gets when they sell stock for a higher price than they bought it for — of those wealthy folks more than ever. In 2021, a record-setting year for the stock market, capital gains accounted for 11.3% of personal income in the state. That’s good when the financial markets are doing well, but shocks to the income of this relatively small group of taxpayers can have a significant impact on the state’s revenue.