Anatomy of Failure: How CA Governor Newsom Turned a Huge Budget Surplus Into a Devastating Deficit

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The state of California raked in a historic $102 billion budget surplus in the last two fiscal years due to COVID relief funds and strong capital gains revenue, so the treasury was looking golden.

What’s a radical blue-state governor to do with such good fortune? Why spend it all, of course—or actually, as Governor Gavin Newsom did, spend even more than that and leave the coffers with a crushing deficit of at least $22.5 billion (it will probably come in higher due to plunging tax revenues).

Newsom seems to be emulating the man he dreams about replacing, President Joe Biden. They certainly have profligate spending habits in common.

The only person alive who would squander a $102 BILLION surplus by giving it all away as “inflation relief” (timed with arrival of mail in ballots for his reelection) only to have $20-30 billion DEFICIT the next year is @CAgovernor @GavinNewsom – state https://t.co/sAkZiAjCuG… https://t.co/121iQtOfk5

— Houman David Hemmati, MD, PhD (@houmanhemmati) February 20, 2023

After enjoying several years of strong revenues despite the pandemic, the state suddenly finds itself seeing much less money coming in, as the Wall Street Journal reports:

The state’s monthly tax revenue in January was about $14 billion lower than during the same month last year. Tax revenue in the current fiscal year that started last July is running about $23 billion lower than in the previous year.

The surprise is that anyone is surprised. California’s top income-tax rate is 13.3% on earners making more than $1 million. The top 0.5% of California taxpayers pay 40% of state income taxes. Volatile equity prices and layoffs at Silicon Valley companies are hitting capital gains. Companies are also cutting bonuses.

Even so, revenue is not actually the main issue—Newsom’s wanton spending is. Where’d all that money go? You guessed it: entitlement programs and climate change. The Legislative Analyst’s Office (LAO) reported, “while revenues are moderating from the recent peak, they are still above average historical levels” and “even after adjusting for inflation, anticipated revenues for 2023-24 remain about 20 percent higher than before the pandemic.”

What’s that mean? The WSJ sums it up nicely:

In other words, the state doesn’t have a revenue problem. It has a spending problem. There’s nothing new under the Sacramento sun.

I was the recipient of some of that spending, receiving a debit card which was embossed with the words, “California Middle Class Tax Refund Card.” As I wrote at the time, it felt like an out-and-out bribe, considering elections were right around the corner.

There was even some talk that the “relief” would be taxed, but thankfully that’s now off the table. Consider the idiocy of such an idea, though: I have to pay accountants to make sense of incomprehensible tax forms so I can send you money, you then give me some of the money back on a debit card, and then I hire the accountants again to figure out how much I now owe in taxes…

Even Catch-22 author Joseph Heller would be impressed with that Byzantine labyrinth.

As a wise woman one said, the problem with socialism is that you eventually run out of other people's money.

California is finding that lesson out the hard way. Again. https://t.co/mq068XAqKX

— Dan K. Eberhart (@DanKEberhart) February 22, 2023

In all, Newsom spent $9.5 billion on tax refunds. Normally I would celebrate such things, but since California is the highest-taxed state in the nation, I would have preferred Sacramento never took it in the first place.

His other priorities from his budget proposal dated June 30, 2022? Let’s see what he was most excited about—the bold type is his—along with my comments in brackets:

We’re now the FIRST and ONLY state in the nation that offers universal access to health care coverage, regardless of your immigration status. [That won’t incentivize more illegal border crossing, I’m sure.]
We’re protecting reproductive freedoms and supporting Californians throughout their lives. In this budget, we’re investing over $200 million in reproductive care. [Abortion funding.]
That means universal preschool, free school meals, expanded before and after school programs, more counselors for our schools, free community college, the list goes on. [Yes, yes it does.]
While SCOTUS is kneecapping the federal EPA’s ability to fight climate change, California is making a climate commitment on the scale of what other countries are spending.Our $53.9 billion in new investments will better protect Californians from the extreme weather that has been impacting our bills, our livelihoods, our farms and our families. We’re investing in fire protection and drought response while forging an oil-free future away from big polluters, and more. [Notice what’s not mentioned: desperately needed rain capture infrastructure, like dams and reservoirs.)
We are making major investments to address California’s homelessness crisis by getting people into housing & shelter. We have $2.2 billion for encampment resolutions around the state…[So far, the more we spend, the more homeless we get.]
So, we’re investing $4.3 BILLION to help keep the lights on this summer, invest in clean and reliable energy infrastructure, help with your energy bills, accelerate our transition to clean energy and so much more. We’re building the energy system of the future. [Well, I hope so, because the current one is an absolute disaster where brownouts are common and eye-popping bills are the norm.]
It’s no longer K-12, it’s Pre-K -16. We are investing a – truly – historic $170 billion to continue our transformation of education in California. From our master plan for early learning to free community college, education has never been more accessible in our state. [California ranks 34^th in academic performance, according to one group.]

The list goes on and on—and on—and some of the ideas (definitely not all) are noble. But the reality is, you simply can’t fund everything.

Imagine you’re given a million dollars—and a year later, you’ve not only spent it all, but you owe the credit card companies tens of thousands you don’t have. That in effect is what Newsom and the Sacramento legislature accomplished almost overnight.

California’s policies have led to the departure of dozens of companies, including Tesla, The Joe Rogan Experience, The Daily Wire, Gordon Ramsay North America, Tesla, Oracle, Hewlett Packard Enterprise, Pabst Brewing, NortonLifeLock, and more. No wonder tax revenues are plunging.

I know that every time I write one of these stories, I will inevitably receive comments to the effect of, “I don’t feel sorry for you, Commifornians! You voted for it, you deserve it!”

I will ask what I always ask when this happens: Did you vote for Joe Biden? Do you deserve the out-of-control budgets and consequent inflation that are bedeviling our economy?

I also point out that I write these stories as a warning—many of these ideas start in California but they end up on your state’s doorstep. Some pooh-pooh the idea of Newsom running for president, but the guy just inexplicably keeps winning elections despite his utter failures as an executive.

Be forewarned. If it can happen here, it can happen anywhere.

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