How Election Results Will Impact Next Year’s State Budget

How Election Results Will Impact Next Year’s State Budget

Gov. Gavin Newsom had a lot riding on the outcome of Tuesday’s election.  How the presidential and congressional elections and one key statewide ballot measure shake out will have a significant impact on how he crafts his upcoming 2021-22 state budget plan, to be released on Jan. 10.

Newsom bet on the passage of Prop. 15, which would impose a split roll property scheme on commercial property in the state.  According to an estimate by the nonpartisan Legislative Analyst’s office, the measure would generate up to $11.5 billion per year in new tax revenue if enacted.

While the new revenue generated by Prop. 15 would not have come in overnight – as it would take some time to implement – Prop. 15’s defeat would take billions off the table that Newsom and Democratic lawmakers could have spent funding their liberal priorities.

Newsom was also counting on big wins for Joe Biden and Democrats in Congress to secure tens of billions of dollars from Washington to shore up California’s budget shortfall.

As Right by the Bay covered earlier this summer, Newsom strongly endorsed Speaker Pelosi’s plan for a nearly $1 trillion bailout of state and local governments from Congress.  But those plans went nowhere amid feuding between Pelosi, Senate Majority Leader Mitch McConnell and Trump.

Newsom’s 2020-21 budget plan enacted in June counted on the state receiving billions from Washington, or else a host of trigger cuts would be automatically implemented this fall.

Though a President Biden will certainly be sympathetic to Newsom’s plight, it’s unlikely to get through Congress.  With Republicans gaining significantly in the U.S. House – Republicans could have as many as 214 seats according to one estimate – and the GOP likely holding on to their Senate majority, a big bailout for states is going nowhere anytime soon.

While Senator McConnell has said that he would like to pass a targeted stimulus package before the end of the year, it’s unclear whether he, Pelosi, and Trump can find agreement on a plan by year’s end, and what – if any – funds it would include for state and local governments.

All of this means that Newsom’s current budget trigger cuts are going to become reality, and he will have to propose further cuts in the budget plan he’s crafting for next year – unless he finds a giant pot of gold at the end of the rainbow.

In one bit of good news, the Department of Finance estimates that the state took in $8.7 billion more than anticipated from July to September thanks to a growing stock market and past Congressional stimulus legislation sending more money to California.  Assembly Democrat budget advisor Jason Sisney tweeted last week that “October income taxes exceeded estimates by another $2+ billion, according to preliminary agency cash data,” which he said would be helpful to address next year’s deficit and other Covid-19 and wildfire-related costs.

At the time he endorsed Prop. 15 in September, he said that he was choosing to support it over other proposals by Democrats in the Legislature to create a “wealth tax” or a state “economic stimulus” plan proposed by Senate Democrats that relies heavily on new borrowing.

Absent a tax windfall from Prop. 15 and a bailout from Washington, Newsom may choose to eat his words and press the Legislature’s Democratic supermajority to push through tax increases.  A push for new taxes would be very complicated for Newsom.  Every interest group will weigh in which taxes to raise, and by how much.  Even with record majorities in both houses of the Legislature, expect a difficult road for Newsom trying to reach agreement on tax increases, if he goes that route.

Tim Anaya is the Pacific Research Institute’s senior director of communications and the Sacramento office.

 

 

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.