As has been reported by many news outlets, California’s robust economy is expected to take a hit as members of the public and businesses respond to COVID-19. Workers and businesses are feeling effects now but how soon will the state government budget feel it?
The first clues come with the state revenue reports on tax filings after April 15, a date that could be changed. The April revenues set up the governor’s Finance Office for preparing the May budget revision. But its possible the state revenues will not see huge drop offs—at least this year.
There will undoubtedly be cutbacks in the May revision, which will be prudent to prepare for next year’s budget that will be greatly affected if the coronavirus continues to undermine the economy. California is perhaps more susceptible than other states to a world-wide economic slowdown because it is tied so closely to trade and the global economy. Some of the state’s largest companies, like Apple for example, rely on products made abroad.
The global economic effects on California were made clear when trade, particularly with China, slowed and at the Port of Los Angeles, 145 drivers were laid off.
Like other locations, the day to day response by consumers also will affect state revenues. As Hitendra Chaturvedi, a professor at Arizona State University and an expert in global supply chains explained, “Sixty to seventy percent of the economy is driven by consumer spending. If panic sets in and if you don’t go out, consumer spending, which is the backbone of this economy, it is going to be hit.”
On top of that, the stock market drop will hit the top 1% capital gains earners in the state who supply nearly half the income tax, the main pillar of the state budget.
Yet, despite these looming problems, the full impact of the economic troubles may not surface immediately.
Because of the stock market sell off, any capital gains from stock sales will produce a pop of revenue for California. In addition, the state is sitting on a $21 billion rainy day fund that can cover some immediate shortfall. Finally, prior to the economic downturn, revenue was ahead of expectations as outlined in state’s financial projections, allowing for some wiggle room if revenues drop down to the more conservative previously predicted amounts.
If the stocks and the economy continue to nosedive, however, then California’s budget is clearly due for a reckoning the following fiscal year and depending on the length of the crisis, it could be an extended period of time before there is a revenue recovery.