12.4: The State Budget

Revenues and Expenditures

Like any budget, the California state budget is a record of revenues (primarily taxes) and expenditures (spending) that occurs within a fiscal year, or a defined period of time for planning and implementing a budget. California’s fiscal year begins July 1 and ends the following June 30.

A budget offers fascinating evidence regarding our priorities as a state. Who pays and who benefits? Are tax burdens distributed fairly? Are expenditures sufficient to meet our needs? In this section, statistics regarding expenditures and revenues for the 2023-24 budget provide an opportunity to consider these questions.

The state budget includes three distinct funds plus federal funds (Graves).

1. The General Fund: revenues that do not have a specific designation but are mostly used for education, health, and human services.
2. Special funds: taxes, fees, and licenses that are designated for specific purposes.
3. Bond funds: Proceeds from the sale of state bonds dedicated to specific purposes, usually infrastructure, such as for transportation.

Table \(\PageIndex{1}\): 2023-24 State Expenditures by Agency (Source: California State Budget 2023-24)

Total State Expenditures by Agency	Totals (in millions)
Legislative, Judicial, Executive	$14,809
Business, Consumer Services, and Housing	4,490
Transportation	17,964
Natural Resources	11,027
Environmental Protection	5,201
Health and Human Services	113,520
Corrections and Rehabilitation	18,543
K-12 Education	80,199
Higher Education	23,488
Labor and Workforce Development	2,014
Government Operations	4,214
General Government      Non-Agency Departments      Tax Relief/Local Government      Statewide Expenditures	4,150      4,048      7, 137
Total	310,804

 

 

Figure \(\PageIndex{2}\) 2023-24 Revenue Sources (Source: California State Budget 2023-24)

Revenue Sources	Totals
Personal Income Taxes	$120,902
Sales and Use Tax	48,824
Corporation Tax	42,081
Highway Tax	9,370
Insurance Tax	3,881
Alcoholic Beverage Taxes and Fees	438
Cigarette Tax	1,492
Motor Vehicle Fees	11,778
Other	44,651
Total	283,417

California taxes itself at a relatively high rate in order to provide health, education, and human services for its residents. According to the Tax Foundation (a nonpartisan nonprofit national think tank), California has the second-highest personal income tax in the country with a progressive tax system topping out at 13.3% for millionaires (2021). Second, California spends a lot, with a per capita state tax spending rate of $12,714 (2021), ranking #5 among the fifty states (“Total State Expenditures Per Capita”). In short, the state meets the challenge of meeting the needs of its residents with high taxes. Because of the dependence on income and sales tax, the volatility of state revenue amounts has led to the state creating reserve funds and relying on bond funding for investment in infrastructure.

Is there public support for high taxes and plentiful state services? Surveys suggest the public supports the Governor’s budget. A June 2023 Public Policy Institute of California poll shows 59% favor the budget, including 79% of Democrats, and 55% of Independents, but just 30% of Republicans. With about 70% of party registration consisting of Democratic or Independent voters, and with only 24% of the electorate registered as Republican (February 2023, Historical Voter Registration), a high tax, and high-spending budget enjoys the support of a majority of Californians.

We can readily see how dependent the state is on personal income and sales tax which will vary a great deal depending on economic conditions. Moreover, these two taxes have very different impacts. The personal income tax is a progressive tax with wealthier people paying a higher percentage. In fact, the top 3% of earners pay about 60% of total personal income tax, according to the California Legislative Analyst. Sales tax is highly regressive. The state rate is 7.5% with many local governments imposing additional amounts. As a percentage of income, the sales tax impacts the poor the hardest. Indeed, the consequence of these two taxes is that the income group that pays the highest portion of their income on taxes is the poorest 20% of the population followed by the wealthiest 20% (Kitson). It is no wonder then, that a 2023 survey of Californians by the Public Policy Institute of California, shows that 57% of all Californians see the tax system as unfair (“Most Californians…”)

Interest in tax reform waxes and wanes depending on whether the state budget is under strain. In 2016, then State Controller Betty Yee convened a Council of Economic Advisers on Tax Reform to develop a systematic approach to tax reform. The Council identified three criteria to use when considering improvements in the system of tax revenues: predictability, sufficiency, and progressivity. They argued that the state’s heavy reliance on income and sales tax made it difficult to predict revenue amounts from year to year. Second, during times of increasing expectations of government, revenues may be simply insufficient to pay for everything that the people demand. Third, the issue of progressivity, or who bears the burden of taxes is of continuing concern. Let’s look at several reform proposals and their current status.

Table \(\PageIndex{3}\): Recent Tax Reform Proposals

Reform Proposal	Description	Efforts to implement
1. Raise Corporation Tax	Proposed in California State Legislature	Rejected by the governor (2023)
2. Increase Taxes on Wealthy	Raise taxes on millionaires to fund electric cars and firefighting	Proposition 30 (2022) rejected by electorate
3. Reform Proposition 13 by raising property tax on commercial real estate	Allow local governments to reassess property at current values	Proposition 15 (2020) rejected by voters
4. Sales Tax reforms	Increase or decrease sales tax	Sales tax on feminine products and diapers removed (2020) Local districts raising revenues by increasing sales tax
5. Change sales tax to include services	The economy is now much more service-oriented, tax labor rather than just tangible products	No bill introduced
6. Reduce property taxes	Safeguard and extend Proposition 13 property tax rates after selling a home	Proposition 19 (2022), extending tax benefits to heirs and to purchase new homes, passes

Reviewing Table \(\PageIndex{3}\), one can see that in the last few years, there have been multiple proposals to increase taxes on the wealthy and on corporations and that they have failed at the ballot box or been opposed by the governor (La).

Nevertheless, anti-tax sentiment remains strong. After property values rapidly rose in the 1970s leading to rapid increases in property taxes, a tax revolt swept across the state. Anti-tax advocates Howard Jarvis and Paul Gann successfully spearheaded the placement and passage of Proposition 13 on the 1978 ballot. Proposition 13 fixed property taxes at 1% of assessed market value at the time that the property was purchased with the rate allowed to increase for inflation, but only up to 2% a year.

One of the most effective interest groups in California is the Howard Jarvis Taxpayers Association. Jarvis formed this interest group after the passage of Proposition 13 in 1978, and, although he passed away in 1986, the organization continues to lobby state government and promote propositions to retain low property taxes. Efforts to allow market value assessment for commercial properties without transfer of title were opposed by the Howard Jarvis Taxpayers Association and voters rejected Proposition 15 in 2020. In fact, Proposition 13 was strengthened in 2022 with Proposition 19,  allowing a homeowner who is at least 55 to transfer their low property tax to a newly purchased home or pass on these low taxes to an heir if the home becomes their heir's residence (Christopher).

The decrease in local revenues following the passage of Proposition 13 forced local governments to turn to the state government to fully fund local expenditures, especially education. The result is that California’s property tax rates rank 33rd out of 50 states, although because of California’s high property values, with regards to property taxes as a percentage of income, California ranks 15th out of 50 (“California Property Taxes).

The issue of volatility in revenues remains a threat due to the state’s reliance on personal income and sales tax. So much of the personal income tax totals are dependent on the profitability of wealthy Californians’ stock portfolios, that a bear market on Wall Street means a slimmer year in Sacramento. One effort to address this problem is to enlarge reserves or “rainy day funds” to anticipate and be able to fund short-term deficits. For example, in 2014, California voters passed Proposition 2 which amended the California Constitution to increase required reserves. For the 2023-24 fiscal year, the reserve funds add up to approximately $38 billion (“California’s State Budget Reserves). Enlarging reserves is one way to address the volatility issue without dramatically changing tax policy.

In Sacramento, prior to 2011, a two-thirds vote was required to pass the budget. A committed minority of the legislature could stop a budget from passing, often resulting in budget delays. In 2010, Californians passed Proposition 25, reducing the fraction of the vote required to pass a bill to a simple majority (it also required that the legislature pass a budget on time or forfeit their pay). However, a two-thirds vote by the legislature is required to raise taxes. This, however, is no longer an impediment in Sacramento because the Democratic party enjoys a supermajority of more than two-thirds in both the State Assembly and the State Senate. Lastly, the state continues to elect Democratic governors, avoiding the threat of a conservative veto of the budget or a tax increase.

In short, because the numbers of Democrats and Independents (registered as no party preference) voters have increased while the number of Republicans has declined a majority in support of increased spending for a whole range of government services has emerged. This is funded with high personal income taxes that impact the wealthy disproportionately and high sales taxes that hit the poor disproportionately. In the meantime, strong post-Prop 13 support for maintaining low property taxes has helped long-time property owners such as senior citizens be able to afford their houses in the face of rapidly increasing home values.

In the long run, the question is whether the growing fiscal demands on the state can be satisfied with current tax policies. Health, education, and welfare spending plus the need for massive investments in infrastructure may push tax rates up even more. At some point, higher tax rates may spark a backlash like what occurred in the late 1970s that led to Proposition 13 limiting property taxes. Alternatively, high taxes may just be one more reason that Californians will feel forced to move to states with lower taxes but often with fewer services.

For Your Consideration

Each year, the governor and the legislators must make many tough decisions about expenditures balanced against projected revenues. According to the California Constitution, the budget must be balanced. Would you like to try your hand at the budget process? Go to the California Budget Challenge, a simulation in which you, the participant, formulate your own budget, learning about each category of spending as you go. Good luck!