California Projected to Have a $26 Billion Tax Revenue Windfall Surplus

The projected $26 billion tax revenue windfall is not all good news.

On November 18, 2020, the state’s Legislative Analyst’s Office (LAO) released its California Fiscal Outlook, which projected a one-time windfall of $26 billion for 2021-2022 that could help the state avoid major budget cuts. The LAO cautioned, however, that California faced rising long-term deficits that will reach $17 billion by 2024.

In May, the economic fallout from the COVID-19 pandemic confronted the state with a projected $54 billion deficit, the largest in the state’s history. Governor Gavin Newsom declared a budget emergency in June, allowing him to use the state’s rainy day fun, and the governor and legislature reportedly agreed to use about $16 billion from the rainy day fund over the next three years. A cash shortage did not occur, however.

The LAO explained the dramatic turnaround in tax revenue by noting that revenue did not drop as anticipated during the pandemic because high-income taxpayers did much better than expected and much better than lower-income taxpayers. The taxpayers had fewer job losses and benefited from a strong stock market. Additionally, by October, California had also regained nearly 44 percent of the more than 2 million jobs lost during March and April.

The projected tax revenue windfall is not all good news, as the LAO projected long-term fiscal deficits. The surplus also demonstrates California’s notorious volatility in tax revenue from a tax structure that receives most of its revenue from the personal income tax, which is dependent on the state’s highest earners.