The California New Car Dealers Associationnotes that total new vehicle registrations in the state stagnated in 2024 and are expected to decline slightly in 2025. The California Chamber of Commerce reports that tourism, which generated over $12 billion in tax revenue from both international and domestic visitors in 2024, is projected to decline by 9.2 percent in 2025.
Rising grocery prices in California are also problematic. The Census Bureau found last year that California’s weekly grocery bill was the third highest in the nation, while prices for fruits and vegetables, dairy, and alcoholic beverages all increased by over 10 percent between 2021 and 2024. Due to the rising grocery costs, “Twenty-nine percent of Californians, and half of lower-income adults, say they or someone in their household has cut back on food to save money,” according to a recent PPIC survey.
Sales tax revenue data from the California Department of Tax and Fee Administration (CDTFA) confirm these disappointing trends. State and local sales tax revenue suffered a slight, but noticeable decline between 2023 and 2024.
Federal tariff policies implemented this year have undoubtedly hurt California’s economy, but state policy is largely responsible for this gloomy reality.
For example, Proposition 12, which restricts how farm animals are raised and bars selling products from farms that do not comply, will impose an estimated cost of $3.5 million on farmers. These costs will likely be passed onto consumers or lead to closures of smaller farms and a consolidation of the industry.
Then there is California’s worsening housing affordability crisis. According to the LAO, the growth in monthly mortgages and rents has significantly outpaced the growth in the state’s median household income or wages since 2020 (see the figure). While interest rate increases have exacerbated affordability, the crisis is being driven by overly restrictive zoning laws, high property taxes, and NIMBYism that have restricted housing supply and contributed to what the LAO describes as California’s ‘unique challenge’ in its housing market.
Rising housing costs are a drain on household budgets that diminish all other household expenditures. This impact not only makes families feel poorer, but it also weakens the broader state tax base.
California’s combination of high and rising prices coupled with growing signs of reduced consumer spending indicates that weaker-than-anticipated sales tax revenue will likely persist. The LAO is currently predicting a $2.6-billion sales tax shortfall for next year’s budget, posing serious problems for California’s education, healthcare and public pension programs.
The volatile national economic trends are fanning the flames set by California. Lacking the necessary fiscal and regulatory reforms from Sacramento, Californians should buckle up, as it’s going to be a wild ride.
Nikhil Agarwal is a Pacific Research Institute research associate.
