State Finance Director Projects Slow Economic Growth; No New Tax Increases Planned

California Finance Director Joe Stephenshaw

California is expected to see slow but steady revenue growth in the 2024–2025 fiscal year, requiring state leaders to cover a $37.8 billion budget shortfall, state Finance Director Joe Stephenshaw told business leaders during a California Chamber of Commerce webinar yesterday.

The shortfall, he said, is primarily due to a $42.9 billion reduction in revenue from personal income, corporate, and use taxes.

As previously reported, Governor Gavin Newsom is proposing to solve for this gap by reducing earlier spending increases, delaying promised increases, tapping rainy day reserves, and some narrow targeted tax increases.

Stephenshaw called the 2022–2023 budget shortfall a “correction” as the state saw historic growth during the COVID-19 pandemic. Even though revenue came in short, the revenue in the 2022–2023 budget year was still 23% higher than pre-pandemic levels.

While the Legislative Analyst’s Office (LAO) is calculating a higher deficit than the Governor’s office, Stephenshaw explained that the Governor is slightly more optimistic about the economy and is expecting higher revenues by reducing spending requirements that are tied to the revenues, especially for schools, and workload adjustments.

The state will be utilizing some of the funds from the Rainy Day Fund, but $18.4 billion will remain in reserve. Stephenshaw expressed hope that the state will not need to utilize these reserves in future budget cycles.

He added that funding for new programs adopted by the Legislature last year is difficult, and the Governor will be making budget cuts and proposing other solutions.

Infrastructure will continue to be a priority, especially streamlining efforts, such as the Sites Reservoir, Stephenshaw said. These projects need to be completed in a timely manner to maximize federal funding from the recent federal Infrastructure Investment and Jobs Act.