Gavin Newsom’s budget ignores California’s ticking fiscal time bomb

Gavin Newsom claims to have balanced the budget for the first time in five years, but the revised proposal he presented this week gives little hope of an improved outlook for the finances of the Golden State.

Rather than addressing the state’s deep structural deficit, Newsom’s new budget proposal relies on small, immaterial changes that merely kick the proverbial can down the road and do nothing to change the dire California fiscal outlook.

Already, California is facing budgetary headwinds, thanks to the growing exodus of wealthy taxpayers fleeing a potential “billionaire tax.” Though it has not passed yet, the proposed 5% wealth tax on the state’s highest earners will be on the ballot in November.

Newsom opposes the billionaire tax. He is attempting to appear to be a moderate, with an eye to the 2028 presidential election. It’s an about-face for one of the progressive politicians in the nation.

Gavin Newsom speaking at a podium with US and California flags behind him. AP Photo/Jeff Chiu

In addition to opposing the wealth tax, perhaps in the hopes of courting high-dollar donors, Newsom also plans to restrict the number of migrants on Medi-Cal, the state’s Medicaid program. Newsom wants to set a ceiling at roughly 200,000 migrants, while other Democrats — including all of the Demcorats running to succeed him as governor — are promising to let every migrant, legal or illegal, enroll in Medi-Cal.

The 200,000 limit is the tiniest possible reform in a state that is controlled largely by public sector unions who contribute to Democrat politicians and expect overly generous benefits in return.

This is the larger challenge driving California’s fiscal problems, and Newsom’s minor fixes are too little, too late. The sheer scale of unfunded pension liabilities alone represents a ticking time bomb that no amount of temporary spending freezes can solve.

The state’s financial outlook remains ominous in part due to exorbitant spending like this for decades. Since California’s 2019-2020 fiscal year, state spending has grown by more than $100 billion. Beyond the fiscal decay, a deteriorating quality of life — marked by rising retail theft, wildfires, and public safety concerns — is further accelerating the departure of families and businesses.

For many, the breakdown of law and order in major urban centers has become a cost too high to pay, even when weighed against the state’s undeniable advantages.

It’s true Newsom’s plan avoids the tax increases that other Democrats would prefer — but don’t be fooled, California still has the highest state income tax rate in the nation, at 13.3%. That doesn’t include sales tax, which can be as high as 10.75% in many cities and counties.

California is also a rare state that taxes all capital gains as ordinary income. This punitive tax structure creates a “volatility trap,” making the state budget hyper-dependent on the stock market’s performance and the residency of a few thousand high-net-worth individuals.

One of the few things keeping California tax revenues afloat is the higher-than-expected tax revenue coming in thanks to the current AI boom. But that could easily disappear with the threat of the California wealth tax.

My Hoover Institution colleagues estimate the state may lose up to $24.7 billion overall (net of whatever revenue the wealth tax would bring in) due to lost income tax revenues from tech billionaires like Mark Zuckerberg, Larry Page, Sergey Brin, Peter Thiel, David Sacks and Travis Kalanick leaving the state.

It is a tragedy of policymaking that so many feel forced to leave a state whose natural beauty, from the rugged Sierra Nevada to the iconic Pacific coastline, is truly unmatched in the world.

People want to live in California, but the government is making it increasingly impossible for them to afford to do so.

Governor Newsom needs to do a lot more if he wants to improve California’s fiscal state. True reform would require a fundamental reimagining of the state’s relationship with its taxpayers, and a serious commitment to spending restraint.

Jon Hartley is a policy fellow at the Hoover Institution.

Download The California Post App, follow us on social, and subscribe to our newsletters