{"id":151505,"date":"2026-01-27T12:04:07","date_gmt":"2026-01-27T12:04:07","guid":{"rendered":"https:\/\/www.newsbeep.com\/us-ca\/151505\/"},"modified":"2026-01-27T12:04:07","modified_gmt":"2026-01-27T12:04:07","slug":"how-california-can-escape-its-boom-and-bust-budget-woes","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/us-ca\/151505\/","title":{"rendered":"How California can escape its boom-and-bust budget woes"},"content":{"rendered":"

Gov. Gavin Newsom\u2019s recently proposed 2026-27 state budget<\/a> included a pleasant surprise: a deficit of about $3 billion \u2014 significantly less than analysts had estimated. But when it comes to California state budgets, good news rarely lasts. Newsom\u2019s own estimates warn that the deficit may reach $22 billion in the following fiscal year.<\/p>\n

It is all too common for California\u2019s budget to careen from year to year. Between 2022 and 2024 the state experienced a $175-billion swing<\/a> from surplus to deficit. This time the crunch came because spending fueled by the post-pandemic economic recovery was not sustainable when revenue plummeted just a few years later \u2014 but the state budget has long gone through similar boom-and-bust cycles.<\/p>\n

Although California\u2019s leaders deserve their fair share of the blame for putting the state on this budgetary roller coaster, there are three underlying factors that make effective fiscal management in California uniquely challenging: an overreliance on the state\u2019s personal income tax; mandatory spending commitments that limit policymakers\u2019 discretion to address challenges; and a lack of accountability for the taxpayer money that is spent.<\/p>\n

First, California has an outdated tax system. In the 2025-26 budget, for example, the personal income tax made up nearly 70% of general fund revenue. By comparison<\/a>, personal income taxes account for 38% of total state tax collections nationally. The Golden State\u2019s extreme reliance on the personal income tax means that when incomes are high in California, revenue collections are strong, but when the economy slows and incomes fall, state revenue weakens drastically too.<\/p>\n

The outsize role that capital gains \u2014 income from certain investments \u2014 play in revenue makes the volatility worse. High earners tend to earn a larger share of their total income this way. In fact, the unexpectedly narrow deficit in Newsom\u2019s 2026 budget was due to what California\u2019s Legislative Analyst Office identified<\/a> as a $42-billion tailwind created by a robust stock market, which led more Californians to earn more capital gains and pay more taxes on those earnings. But when equity markets aren\u2019t performing well, collections take a major hit. Consider this contrast: In 2021, capital gains accounted for almost a quarter of the personal income tax liability in the state, compared with just 10% in 2023.<\/p>\n

The reliance on personal income taxes means that as the highest earners leave, so does California\u2019s revenue. In the 20 years leading up to 2023, the top 1% of income earners in the state were responsible for an average of 45% of total personal income tax liability. That\u2019s why policies like the recently discussed \u201cbillionaires tax\u201d could lead to capital flight from California, jeopardizing the state\u2019s ability to fund basic services.<\/p>\n

The second complicating factor in California\u2019s budget process is the amount of money tied up in spending commitments over which policymakers have little discretion. Many of these restrictions have been imposed by voters over the last several decades in ballot initiatives that have passed with significant margins. Together, these provisions \u2014 while well-meaning and politically popular in many cases \u2014 create limitations that make budgeting a challenge in California.<\/p>\n

For example, funding for the state\u2019s public schools is largely guaranteed by Proposition 98, a state constitutional amendment approved by voters in 1988 that establishes an annual minimum funding amount for public K-12 schools and community colleges. About 40%<\/a> of the general fund budget in California, or nearly $90 billion in 2026, is committed without exception to K-14 schools through Proposition 98.<\/p>\n

California voters have also approved tens of billions of dollars in borrowing over the last 20 years that the state\u2019s constitution requires be paid back from the general fund. These bond authorizations create obligations to repay borrowing for priorities as wide-ranging as health facilities, water infrastructure and wildfire prevention. Repaying these \u201cIOUs\u201d requires policymakers to trim spending in other areas. Also, the state\u2019s rainy-day fund, which is designed to insulate the budget from economic downturns, requires an annual set-aside of 1.5% of estimated general fund revenue.<\/p>\n

Finally, California has no systematic way of providing accountability for and assessing whether any of its spending is producing promised outcomes. Governments at every level struggle with the concept of detailing what the \u201creturn on investment\u201d is for public spending. But the situation in California is particularly dire. Thus, taxpayers are often stuck financing underperforming government programs riddled with waste and outright fraud<\/a>, as was the case in the recent $30-billion scandal that afflicted the state\u2019s unemployment insurance program.<\/p>\n

In the mid-2000s, California commissioned a unified financial accounting and transparency system known as Fi$Cal that was supposed to replace several outdated systems. Over a billion dollars and several blown deadlines later, the platform still isn\u2019t complete and won\u2019t be fully operational<\/a> until July 1, 2032. While the state auditor, an official appointed by the governor, does a credible job of analyzing state spending, recommendations for improvements are often not implemented<\/a>. And the state controller \u2014 the elected chief fiscal officer who is responsible to voters for financial oversight of state spending \u2014 hasn\u2019t produced<\/a> California\u2019s annual financial audit on time since 2017.<\/p>\n

It\u2019s hard for a state to properly manage its finances when there\u2019s confusion over how much it\u2019s really spending, or whether that money is achieving its intended purpose. But that\u2019s become business as usual here.<\/p>\n

Policymakers will have a tough time addressing California\u2019s budget and fiscal challenges unless each of these three underlying factors is addressed. Our antiquated tax code should be reformed to reduce reliance on the personal income tax and raise revenue in a more predictable way. Californians must understand that there are long-term implications of borrowing to address challenges and warily approach future bond measures and other initiatives that tie the hands of policymakers today. And voters should elect politicians willing to provide them with the oversight that\u2019s needed for the taxpayer money that Sacramento spends.<\/p>\n

Without these changes, Californians are probably headed for more fiscal follies in the years ahead.<\/p>\n

Lanhee J. Chen is a fellow at the Hoover Institution at Stanford University and was a candidate for California state controller in 2022.<\/p>\n

If it\u2019s in the news right now, the L.A. Times\u2019 Opinion section covers it. Sign up for our weekly opinion newsletter. <\/a><\/p>\n

This story originally appeared in Los Angeles Times<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"Gov. Gavin Newsom\u2019s recently proposed 2026-27 state budget included a pleasant surprise: a deficit of about $3 billion…\n","protected":false},"author":2,"featured_media":151506,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[7,9,8,457,13873,49703],"class_list":["post-151505","post","type-post","status-publish","format-standard","has-post-thumbnail","category-california","tag-california","tag-california-headlines","tag-california-news","tag-gavin-newsom","tag-income-tax","tag-state-budgets"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts\/151505","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/comments?post=151505"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts\/151505\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/media\/151506"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/media?parent=151505"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/categories?post=151505"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/tags?post=151505"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}