California’s state revenue is $25 billion above the governor’s January budget projection, largely because of private-sector economic activity, the Legislative Analyst’s Office (LAO) reported in a May 7 blog post.
The post added a warning: “Revenues are surging but appear unsustainable.”
“Our updated forecast of revenues from the state’s three largest taxes (income, corporation, and sales) shows a $25 billion upgrade over the Governor’s Budget across the budget window (prior year to budget year),” the LAO wrote. “This upgraded outlook is almost entirely attributable to higher expectations for income tax collections, which are being driven by enthusiasm around AI and the related stock market boom. As such, we continue to caution that these surging revenues likely are not sustainable. This suggests it would be prudent to approach the state budget as if we are at or near a revenue peak.”
Income tax collections “continue to be boosted by a roaring stock market – which is up 75 percent in the last three years alone,” the report stated.
“December and January income tax payments to the Franchise Tax Board (which reflect non-wage income like investment and business earnings) were up more than 50 percent from a year ago,” the LAO wrote. “April income tax payments continued this trend, posting nearly 50 percent growth over last year. The state has seen similar growth only a handful of times, with notable examples coming during asset price booms in 2000 and 2021.”
CalTax President Robert Gutierrez said the revenue increase illustrates the importance of focusing on state and local policies that encourage private-sector economic activity.
“The AI boom alone doesn’t translate into a guarantee of long-term revenue, but by attracting and retaining jobs and investments in a wide variety of industries, California can solidify its revenue base significantly,” Gutierrez said. “Economic growth is always the best source of new revenue, and growth is fostered by sound and predictable tax policy, avoiding unnecessary regulations, and encouraging positive relations with the state’s foreign trading partners.”
The LAO said its revenue update “does not imply that the [Newsom administration’s] May Revision will show an equivalent improvement in the state’s budget condition.”
“Under the state’s constitutional budget formulas, each additional dollar of General Fund revenue triggers roughly $0.50 in required spending – primarily for K‑14 education – meaning the net improvement would be closer to $12 billion,” the LAO wrote. “The May Revision also will reflect other budgetary changes and updated estimates from the administration, including revenue estimates that will differ from ours.”
The analyst additionally warned that “booms almost always come with an eventual bust.”
“It is now hard to ignore that the stock market appears, on its face, to be in a speculative bubble, rivaled only by the dot-com boom and the Roaring Twenties,” the LAO wrote. “Such speculative episodes almost always end in dramatic reversals. … With the high risk of a reversal in both the stock market and state revenues, we advise against treating the current level of revenue as a sustainable foundation for multiyear budgeting. Instead, the state should be prepared for revenues to be tens of billions lower within one or two years. … One way the Legislature can prepare is to avoid using reserves or taking on new debt.”