California’s Deficit Widens; How to Plan for Higher Taxes

Gavin Newsome’s surplus dream has turned into California’s deficit nightmare.

Remember our supposed $100 Billion budget surplus? It turns out that was a fantasy: State budget advisor, Gabe Petek issued a sobering corrective report on the state’s finances, saying tax revenues were likely to fall $41 billion short of what Newsom and legislators had announced, leaving the state with a $25 billion projected deficit for 2023 (they haven’t confirmed final numbers).

2024’s projected deficit ballooned to $73 Billion.

How did they misjudge our state’s finances so poorly? The Hoover Insitute explains it was a combination of

  1. Booking Federal Covid Relief money as profit

  2. Undercounting liabilities

  3. Increased entitlement spending

  4. Falling income tax revenues from population losses

  5. Newsome’s “optimism” leading to miscalculated dollars

Unfortunately, optimism won’t balance our budget. California lawmakers have been working on a new budget proposal this month aimed at reducing the annual deficit.

Any additional budget shortfall would only add to California’s long-term debt (totaling over $1.6 Trillion).

What ultimately happens is anyone’s guess, but it would be surprising if we didn’t see proposed tax increases alongside spending cuts.

This is just one reason we’re prioritizing the tax impact as part of our financial planning and investment decision process.

Here are three things California residents should consider:

  1. Setting up an employer-sponsored retirement plan; all dollars added to these plans reduce Federal and State income tax. Many business owners already know the combined top tax rate is over 50% for California residents.

  2. Watch your income: 5% interest rates are nice, but savings accounts and CD interest is fully taxable. California Municipal bonds pay interest which is exempt from federal and state tax. Treasuries avoid California income tax. It’s worth double-checking your fixed income for tax efficiency.

  3. Utilize Roth Accounts. If you’re young and believe tax rates are increasing, you might consider sheltering some money in a Roth IRA or 401(k) account. All growth and future withdrawals are completely tax-free. Imagine decades of compounding and avoiding the future tax bill on those gains.

If you need help, give us a call. We’re happy to help you explore potential solutions.

Joe SweeneySweeney & Michel, LLC