Legislative Analyst Takes First Look at Coronavirus Impact on State Budget

Economic uncertainty due to the coronavirus (COVID-19) pandemic will create logistical and financial challenges for the state budget, the state Legislative Analyst commented this week.

In his March 18 post, Legislative Analyst Gabriel Petek describes both the strength of California’s fiscal position at the start of the year and the COVID-19-related developments that will counter the positives.

Lower capital gains tax returns due to the stock market drops could lower Governor Gavin Newsom’s proposed $20 billion reserve for 2021 by “several billion dollars,” Petek noted.

He pointed to the sudden “pullback in activity across wide swaths of the economy,” especially the service sectors, as “particularly problematic.”

The timing of the COVID-19 outbreak— between the January release of the Governor’s proposed budget and the May revision to that proposal—plus volatile financial markets and the rapidly changing economic picture “inject major uncertainty into the May revenue estimating process and budget wrap up,” Petek said.

Adding to the challenge of developing a state budget is the Governor’s executive order directing state tax agencies to extend the state tax filing deadline for an indefinite period; the time is left up to the tax agencies in their administrative authority.

“Given that it will take time to appraise the ultimate effects on the state, the Legislature may need to take incremental steps—like adopting a workload budget in the nearer term—to buy time beyond its constitutional deadline to pass the budget (June 15) to assess the state’s ultimate fiscal capacity,” Petek commented.

He further speculated: “After addressing immediate emergency funding needs, the Legislature likely will turn its attention to aiding the state’s recovery from the public health and economic effects of COVID-19. Out of necessity, the Legislature may have to prioritize assistance to adversely affected small businesses, nonprofit agencies, and individuals. Furthermore, it is now plausible that these efforts will have to take place with the state facing a budget problem in 2020–21.”