California Has the Highest State Debt in the US After Reliance on Tax Payers Backfires

It paints a bleak picture of its fiscal health. And it’s only made worse by a surge in unemployment during the pandemic that emptied out its employment trust fund.

$650 million in interest has already been paid, but there’s an additional $50 million due in September. All this puts more pressure on California to answer its financial obligations.

It is now more expensive than ever for Californians to borrow money. This means that fewer people are buying homes and fewer businesses are hiring workers, leading to fewer tax collections.

While other states have paid down their debts, including those with high general-fund debt like Illinois and New Jersey, California continues to struggle with repayments.

With the rise of unemployed workers rising to nearly 200,000, fewer people borrowing money, and more and more wealthy residents leaving the state, there are fewer tax collections than the state is used to receiving.

That response, so far, has come in the form of raising payroll taxes for employers. The California government also increased surcharges on state and federal payroll taxes. These measures didn’t completely alleviate the deficit.

Another challenge adding to the strain is the projected $73 billion budget deficit for fiscal year 2024. A decline in tax revenue (because residents have begun moving away from California) is to blame.

While they proposed a $17.3 billion cut in budget, the measure — once again — wouldn’t bridge the substantial deficit gap.

The budget cuts would also include reduction in funding for state departments and employee payment. Another component of the proposal is a $4 billion expansion of tax on health insurance plans that would allow California to draw matching federal funds.

And most people can forget about programs to fund low-income housing. Instead, they can look forward to more rising house prices, where house prices are already exorbitant.

Meanwhile, a column in the L.A. Times wrote how California’s unstable tax system caused all sorts of problems. The tax system, the column said, relied too heavily on the rich and “politicians are too cowardly to fix it.”

California does experience job growth, but only in certain areas (government jobs, leisure, and hospitality among them.) And not all the state government’s employment policies are met with open arms.

And the wage increase is not entirely equal. Certain employees may benefit from the minimum wage increase, provided their stores do not fall under exemption. If their stores are exempt, they may not get the salary raise they’ve been anticipating.

The California Department of Finance estimates that the wage increase will cost the state about $2 billion in the budget due to increased labor costs and Medicaid payments to hospitals.

“Republicans cautioned that this level of spending would lead to greater deficits, and it would be more prudent to show restraint. Unfortunately, the majority party ignored those warnings,” said state Sen. Roger Niello, a Republican from Fair Oaks and vice chair of the committee that oversees the state budget (via CalMatters).

Now that the federal aid has stopped as the pandemic is no more, California is among the states experiencing the biggest income loss (about 4%).

The proposed initiative taxes residents and businesses 1.5 percent for net worths exceeding $1 billion. In 2026, the rate will adjust to 1 percent for net worths over $50 million.

Businesses in the tech sector, which have been a backbone for the state’s economic growth and revenue, are cutting back on expenses. Sometimes, this means leaving the state for cheaper options.

State officials decided to give people and businesses more time to pay their taxes this year due to the high amount of damages reported last year. Californians did not have to pay their 2022 taxes until November of this year.

If insurance is available, the cost is so high that only the wealthy residents of that state can afford it.

The payments were delayed until Oct. 16 but were pushed back hours before the deadline to Nov. 16, 2023.  In line with the federal action, California also extended its due date for state tax returns to the same date.

This lack of clear perspective forces California to make decisions based on projections instead of concrete facts, which could backfire on the state.

Mellon continued: “Now that we have a clearer picture of the state’s finances, we must now solve what would have been last year’s problem in this year’s budget.”

The state definitely faces a constant uphill battle to settle its finances. And who knows how long it might take California to boost up its economic prosperity. California residents can only hope and pray.