California can avoid the boom-and-bust cycle of budgeting

Three major factors contribute to the state's recurring crises. Some are easier to solve than others.

- LANHEE J. CHEN GUEST CONTRIBUTOR

GOV. GAVIN NEWSOM discusses the state's rainy-day fund in January 2020.

(RICH PEDRONCELLI Associated Press)

Gov. GAVIN NEWSOM'S recently proposed 2026-27 state budget included a pleasant surprise: a deficit of about $3 billion significantly less than analysts had estimated. But when it comes to California state budgets, good news rarely lasts. Newsom's own estimates warn that the deficit may reach $22 billion in the following fiscal year.

It is all too common for California's budget to careen from year to year. Between 2022 and 2024 the state experienced a $175-billion swing from surplus to deficit. This time the crunch came because spending fueled by the post-pandemic economic recovery was not sustainable when revenue plummeted just a few years later but the state budget has long gone through similar boom-and-bust cycles.

Although California's leaders deserve their fair share of the blame for putting the state on this budgetary roller coaster, there are three underlying factors that make effective fiscal management in California uniquely challenging: an overreliance on the state's personal income tax; mandatory spending commitments that limit policymakers' discretion to address challenges; and a lack of accountability for the taxpayer money that is spent.

First, California has an outdated tax system. In the 2025-26 budget, for example, the personal income tax made up nearly 70% of general fund revenue. By comparison, personal income taxes account for 38% of total state tax collections nationally. The Golden State's extreme reliance on the personal income tax means that when incomes are high in California, revenue collections are strong, but when the economy slows and incomes fall, state revenue weakens drastically too.