Sacramento’s next governor will inherit a budget mess years in the making. But the shape of that mess, and how bad it gets, may be locked in before any new administration even moves into the Capitol.
The Legislative Analyst’s Office projects structural deficits of $18 billion in fiscal year 2026-27, climbing to $35 billion in 2027-28 and beyond. Those aren’t one-time shortfalls from a bad year. They’re baked in.
Five candidates competing for governor got a direct question about it at a recent debate hosted by Jewish California: raise taxes, or get more out of the money the state already collects? Eric Swalwell and Tom Steyer said raise taxes. Matt Mahan, Steve Hilton, and Antonio Villaraigosa said California needs to perform better with what it already takes in. All five agreed there’s a problem. That’s about where the consensus ends.
The spending numbers are stark. Over the past seven years, California’s general fund expenditures have risen about 66%. Inflation accounts for roughly a third of that increase. The rest is structural growth, and it’s happened while the state’s net population has actually fallen by 450,000 people. The number of state employees per resident is up 19%.
Not great.
In total, 1.8 million Californians have left the state, partially offset by immigrant growth and births. Between 2018 and 2022, about 57,000 high-net-worth individuals departed, taking roughly $1.1 trillion in personal wealth with them, according to Pete Weber and Chris Thornberg, both board members of the New California Coalition, a group that tracks these trends. Thornberg is also a founding partner of Beacon Economics.
The outcomes track with those numbers. California carries the highest unemployment rate in the country and the lowest housing affordability in the continental United States. Median home prices run at twice the national average. The state has spent $23 billion on homelessness while the houseless population rose 40%. Infrastructure rankings sit near the bottom nationally.
Weber and Thornberg point to a core structural flaw: California’s tax base depends too heavily on high-income earners and capital gains. That makes revenues surge during bull markets and crater when they don’t. The boom-and-bust cycle isn’t an accident. It’s built into the system.
The fix they argue for isn’t simply spending cuts or tax hikes. It’s fiscal discipline and bigger reserves, so the state stops spending windfall years like the money is permanent, then scrambling when it evaporates. California does have a rainy day fund, the Budget Stabilization Account, created under Proposition 2 in 2014. But it hasn’t been enough to smooth out the volatility, and recent years have drained it faster than it was filled.
Gov. Gavin Newsom and the Legislature will make decisions this year that will constrain whoever wins in November. Voters may also weigh in on a proposed wealth tax, which, depending on its design, could accelerate departures or generate new revenue. Either outcome reshapes the playing field.
The Jerry Brown era gets cited often as a model of fiscal restraint, at least in the early years. Brown did impose meaningful discipline after the state’s post-2008 wreckage. But he also helped make California’s top marginal income tax rate the highest in the nation starting in 2012, a move billed as temporary that became permanent. That dependence deepened over time, not shrank.
Employers who have relocated out of state consistently name taxes, regulation, and bureaucracy as key factors, according to Weber and Thornberg. That feeds directly into the weak job market, which feeds into the tax revenue problem. It’s a loop.
So the debate among candidates about whether to raise taxes or spend smarter may be somewhat beside the point if the underlying volatility isn’t addressed. You can raise rates on a tax base that keeps shrinking, or you can collect the same rates from a growing one. California’s trend for several years has pointed toward the former.
CalMatters first reported on this analysis from Weber and Thornberg, who argue the state needs to treat reserve-building as a structural priority, not an afterthought in flush years.
The candidates will keep debating. The budget math, though, doesn’t wait for elections.