California poised for $19 billion surplus, despite COVID-19 lockdowns
A year ago, state lawmakers cut spending, raised taxes on some businesses, borrowed money and pulled from the state’s savings account — all to prepare for having less money.
By the end of 2020, the COVID-19 pandemic eviscerated roughly 1.6 million jobs in California and slashed the value of business properties by more than 30%. Despite it all, California managed to collect $10.5 billion more in taxes than predicted, putting the state on track for a $19 billion surplus to spend by the end of the fiscal year on July 1.
It’s so much money that, for just the second time ever, the state is projected to trigger a state law requiring the government to send refunds to taxpayers.
That put states like California, with a tax code that relies heavily on the rich, in a strange place. A year ago, state lawmakers thought this downturn would behave like other downturns. They cut spending, raised taxes on some businesses, borrowed money and pulled from the state’s savings account — all to prepare for having less money.
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But the state's wealthiest workers, who have been able to work from home, have emerged relatively unscathed. Lower-wage workers, meanwhile, bore the brunt of the losses.
The economic losses started at the bottom of the income ladder and so far they haven’t made their way up to the top. Still, the state’s revenues went up. And billions of dollars from the federal government, which paid for things like hotel rooms for the homeless and home-delivered meals for seniors, also softened the blow.
Unlike most states, California taxes capital gains — mostly money made from investments and stocks — the same as money made from wages and salaries. The result is 1% of the population accounts for nearly half of the state’s income tax collections.
That 1% had a pretty good year in 2020, financially speaking. The stock market is 16% above its pre-pandemic high in February 2020. A slew of California tech companies, led by Airbnb and DoorDash, debuted on the stock market last year, adding to the state’s population of millionaires and billionaires.
The Newsom administration projects Californians will earn $185 billion from capital gains — the most ever — resulting in $18.5 billion in tax revenue for the state.
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“It does point to an overreliance of a very small population of taxpayers,” said David Kline, spokesman for the California Taxpayers Association, which favors limited taxation. “In general, you want a broad base of taxpayers at the lowest rate possible.”
But California’s windfall means it can increase spending at a time when many people can’t. Last week, Newsom signed off on $7.6 billion in new spending, including more than $2 billion in grants for struggling small businesses and $3.6 billion to send $600 one-time payments to nearly 5.7 million people.
Legislative leaders say they plan to pass another $2.3 billion in tax breaks for businesses in the coming weeks, bringing the state’s aid package to nearly $10 billion.
While California has more money, the pandemic has brought more expenses. Schools need more money to reopen after months of distance learning.
While employment has increased slightly in California for people who earn $60,000 a year or more, employment has dropped nearly 30% for people earning less than $27,000 per year, according to Opportunity Insights, an economic tracker based at Harvard University.
California’s economy has been buoyed by unemployment benefits, which Congress has expanded and extended multiple times. As of December, nearly 90% of people either unemployed or underemployed were receiving jobless benefits in California, according to new research from the California Policy Lab. That’s an increase from earlier in the pandemic, when only about half such people were getting benefits.
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“The rather recent spurt in revenue growth that we’ve seen should in no way be taken to mean that California’s economy overall has recovered from the COVID-19 recession,” said H.D. Palmer, spokesman for the California Department of Finance. “Unfortunately, we’ve got a long way to go.”
The Associated Press contributed to this report.