California will have a $31 billion budget surplus next year as revenues continue to climb despite the pandemic, according to a new forecast from the state's independent Legislative Analyst's Office.
The predicted surplus is so large the office estimates California will surge past a constitutional limit on state spending by more than $14 billion. That could require Gov. Gavin Newsom and state lawmakers to either cut taxes, spend more money on schools and infrastructure or — perhaps the more popular choice in an election year — give rebates to taxpayers.
California's tax collections have continued to soar despite the pandemic. From April through June of this year, California businesses reported a record high $216.8 billion in taxable sales — a 38.8% increase over the same period in 2020 and a 17.4% increase over those months in pre-pandemic 2019. Nick Maduros, director of the California Department of Tax and Fee Administration, said it is “a sign that business owners found creative ways to adapt during a difficult year."
California's “budget year” runs from July 1 to June 30. During the first three months of this budget year, California tax collections are more than $10 billion ahead of projections. The LAO predicts that by June of 2022, California will have collected $28 billion more in taxes and transfers than they had expected.
This means there will likely be a significant increase in spending on public schools. The state Constitution requires lawmakers to spend about 40% of state tax collections on public education each year. The LAO said Wednesday that means public schools and community colleges could see an $11 billion increase.
All of this is possible because of a historic surge in tax collections. In September, collections from taxes on income, sales and corporations were 40% higher than September of last year and almost 60% higher than September 2019. That's because retail sales have had double digit-growth this year and stock prices have doubled from their low point last spring at the start of the pandemic.
But the LAO said it's “impossible” to know whether these gains are sustainable. Prices for goods and services are going up because of inflation. In October, the nationwide growth in retail sales of 1.7% was mostly because prices rose 0.9% during that same time period, according to new data from the U.S. Census Bureau. Gas prices grew even faster.
The Legislative Analyst's Office says most economic forecasters predict inflation will slow down by next year but conceded that prediction “comes with significant uncertainty.”
“Recognizing this, our main revenue forecast takes a middle ground of possibilities, assuming neither that the gains are entirely sustainable nor that they are entirely unsustainable," the LAO wrote in its annual Fiscal Outlook.
The LAO said while they are predicting a $31 billion surplus, it could be as low as $10 billion or as high as $60 billion depending on how much money the state collects from taxes.
If the numbers hold, the LAO says California could have as much as $21 billion in its main savings account, or about 10% of all general fund revenues and transfers.