How a “surplus” turned into stress
In 2022, California was celebrating a record $97.5 billion budget surplus. Then, in what felt like a blink, the state was talking about large deficits and pullbacks. That kind of whiplash is rare, even for California.
A big reason is that the surplus was tied to a post-pandemic revenue spike that did not last. When the economy and markets cooled, the tax surge faded fast. The budget built on “up” money, but the state had to live through a “down” year.
The “phantom surplus” idea
California’s budget can look stronger than it really is during boom years. When wealthy taxpayers realize big capital gains, revenues jump, and forecasts look sunny. That can feel like “extra” money, even if it’s one-time.
Reporters and analysts called it a mirage: the 2022 surplus was driven largely by temporary capital-gains and other one-time receipts that evaporate when markets cool, a point stressed by outlets such as CalMatters and nonpartisan analysts. Once that spike ended, the state faced a painful reset. This is why some budget experts warn against treating peak-year revenue like it will repeat every year.
A tax system built on highs and lows
California relies heavily on personal income tax, especially from top earners. When markets rise, tax receipts can surge. When markets fall, the drop can hit hard and fast.
That design makes California more sensitive than many states. It’s not about one paycheck tax being late or one industry slowing down. It’s about the state’s biggest revenue source being tied to boom-and-bust income patterns.
What the 2022 market slump did
The stock market fell in 2022, and California felt it at tax time. The LAO said the state saw a severe revenue decline in 2022–23. That drop helped create the big deficit problem lawmakers had to solve.
One widely cited data point: total income tax collections were down about 25% in 2022–23. When income taxes dip that sharply, the budget math changes fast. It’s like planning a road trip, then your gas money disappears mid-drive.
Why leaders didn’t see it sooner
In 2023, storms changed the tax calendar in a big way. Many California filers got extra time, pushing key deadlines to November 16, 2023, in disaster-impacted areas. That delayed the full picture of how much revenue had fallen.
So budget planning happened with incomplete information. By the time the state saw more complete data, spending commitments were already in motion. This timing gap made the correction feel sharper and more sudden.
The spending commitments kept growing
A surplus year invites big ideas, and California made many of them: the 2022–23 budget package committed just over $300 billion in state spending (roughly $300–$308 billion, depending on how federal funds and special funds are counted), enabling major one-time and ongoing expansions. Those choices were easier to make when revenues looked unstoppable.
Then the revenue wave receded. The state still had programs to fund, but less money coming in. That’s how shortfalls can feel “new,” even when the bills are from decisions made during the good times.
Little-known fact: Proposition 98 created a minimum funding guarantee for K–12 schools and community colleges, which shapes budget flexibility in deficit years.
The LAO’s “serious deficit” warning
In December 2023 the nonpartisan Legislative Analyst’s Office estimated a roughly $68 billion shortfall under current law and policy — a figure that became the centerpiece of the 2024 budget debate.
Think of it as the amount lawmakers needed to solve through cuts, delays, reserves, or new revenue. It was not a single bad month. It was a multi-year hole created by a steep revenue slide after a peak-year surge.
Little-known fact: California’s modern rainy-day fund rules were strengthened by Proposition 2 (2014), which caps the Budget Stabilization Account at 10% of General Fund revenues.
Why interest rates mattered too
As the Federal Reserve raised rates to fight inflation, the economy cooled. Higher borrowing costs can slow investment and hiring. That’s especially noticeable in tech-heavy regions like the Bay Area and parts of Los Angeles County.
When economic activity slows, tax collections can soften as well. California doesn’t just feel this through sales taxes. It can show up through income taxes tied to bonuses, stock-based pay, and business growth.
Little-known fact: California taxes capital gains as ordinary income and does not offer a special lower state capital gains rate.
Temporary fixes became the go-to move
When a deficit hits, states often reach for short-term tools first. California has used reserves, delays, and shifts that push costs into later years. These moves can buy time, but they don’t erase the underlying mismatch.
That’s why you keep hearing terms like “one-time solutions” and “deferrals.” They are real budget tools, but they’re not a forever plan. If revenues don’t rebound enough, the same gap can show up again next year.
The “structural” problem is the scary part
A one-year deficit is hard, but manageable. A structural deficit is harder because it’s built into the trend line. The LAO warned that starting in 2027–28, structural deficits could grow to about $35 billion annually.
That’s the warning light on the dashboard. It suggests spending growth could keep outpacing revenue growth, even in decent years. It also means budget fights may not stay “one and done,” but become a regular Sacramento storyline.
Why forecasts keep changing
Budget numbers are estimates, and California’s can swing quickly. Revenues tied to capital gains can surprise on the upside or downside. That’s why different official forecasts can show very different deficit sizes in the same season.
This is also why you’ll see headlines like “smaller than expected” one month, then “bigger risk” the next. It’s not always that someone messed up. It’s often the case that the tax base is unusually sensitive to market timing.
What gets squeezed when money is tight
When budgets tighten, the state often trims flexible pots first. That can include delays in climate, housing, or one-time program boosts, because they’re easier to postpone than core formulas. It’s a “pause what you can” approach.
But some spending is harder to move. Education funding has constitutional rules, and health and human services can rise automatically with need. The result is that cuts don’t land evenly, even when leaders try to spread the pain.
In other news, California’s mansion tax raised $1 billion, but barely any of it has been spent.
What this means for regular Californians
Most people don’t follow budget PDFs; they feel outcomes. A budget squeeze can show up as slower program rollouts, delayed grants, or fewer “extras” in state services. It can also affect local governments that rely on state dollars.
This is why the surplus-to-deficit story matters outside Sacramento. When revenues jump, expectations rise too. When revenues drop, the state has to unwind plans, and that can feel like a sudden reversal for families and communities.
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