California's Cash Surplus Projected to Be So Large, Some Could Go Back to Taxpayers

California will have such a large budget surplus next year that money will likely be returned to taxpayers in order for the state to align with constitutional limits on state spending, the Associated Press reported.

The forecast comes from California's independent Legislative Analyst's Office (LAO), which released their annual Fiscal Outlook report Wednesday, predicting a $31 billion surplus in the state's 2022 budget year that begins July 1, 2022.

Governor Gavin Newsom and state lawmakers can cut taxes, raise spending on public schools and infrastructure or give rebates to taxpayers, the most likely option as the decision will be made in an election year, according to the AP.

Newsom will reveal his budget proposal in January and said Wednesday that they will likely return money to taxpayers as they did this year when they approved $12 billion in rebates because the state had a surplus that exceeded their spending limits.

From April through June of 2021, California's businesses reported a record high $216.8 billion in taxable sales. This is a 38.8 percent increase over the same time period last year, and a 17.4 percent increase over the months in 2019.

The LAO said it is impossible to know whether the gains are sustainable, as some of the gains are attributable to inflation as prices have risen 0.9 percent nationwide in October, with gas prices rising even faster, according to data from the U.S. Census Bureau.

California's projected surplus in tax collections will likely mean an increase in spending on public schools as the state's constitution requires about 40 percent of tax collections on public education. According to the LAO, that could mean an increase of nearly $11 billion in funding for public schools and community colleges.

For more reporting from The Associated Press, see below.

California, Gavin Newsom, Inflation, Budget Surplus
California will have a $31 billion budget surplus next year as revenues continue to climb despite the pandemic, according to a new forecast. Above, California Governor Gavin Newsom speaks about his 2021-2022 state budget proposal during a news conference in Sacramento, California, on January 8, 2021. Rich Pedroncelli/Associated Press File

"How we framed that historic surplus last year, similarly, we will frame our approach this year," Newsom said during a news conference at the Port of Long Beach. "I'm very proud of the historic tax rebate last year, and I look forward to making the decision that I think is in the best interests of 40 million Californians."

California's tax collections have continued to soar despite the pandemic. Nick Maduros, director of the California Department of Tax and Fee Administration, said it is "a sign that business owners found creative ways to adapt during a difficult year."

In September, collections from taxes on income, sales and corporations were 40 percent higher than September of last year and almost 60 percent higher than September 2019. That's because retail sales have seen double digit-growth this year and stock prices have doubled from their low point at the start of the pandemic last spring.

In October, the nationwide growth in retail sales of 1.7 percent was mostly because prices rose 0.9 percent during that same time period, according to new data from the U.S. Census Bureau.

While most of the state's wealthier workers kept their jobs and kept paying taxes during the pandemic, the state's lower-wage workers were hit hard by government-ordered closures of restaurants and other public spaces. More than 18 months into the pandemic, California is tied for the highest unemployment rate in the nation at 7.5 percent.

"There's something wrong when the state is flush with extra cash—$750 for every man, woman and child—while ordinary people have to choose between putting food on the table and filling their gas tank," Assembly Republican Leader Marie Waldron said.

California's "budget year" runs from July 1 to June 30. During the first three months of this budget year, California tax collections are more than $10 billion ahead of projections. The LAO predicts that by June 2022, California will have collected $28 billion more in taxes and transfers than officials had expected.

"California's strong fiscal health is not an accident. It is the direct result of a decade of responsible budgeting by Democratic legislators and governors that enabled the state to survive the pandemic downturn," said state Senate President Pro Tempore Toni Atkins, a Democrat from San Diego.

Despite California's wealth, Atkins said "too many families struggle just to get by." She said the Legislature will "work to craft transformative priorities that put California's wealth to work building a more equitable economy and a stronger middle class."

Newsom said Wednesday he'd like to put most of the surplus either in the state's savings account or spend it on one-time items that don't require ongoing funding "so that we're not caught flat-footed when the economy contracts, when the markets begin to adjust."

"We are going to substantially increase our one-time investments in infrastructure," Newsom said. "That's one (budget) preview you can count on."

The Legislative Analyst's Office says most economic forecasters predict inflation will slow down by next year but conceded that prediction "comes with significant uncertainty." While the LAO is predicting a $31 billion surplus, it could be as low as $10 billion or as high as $60 billion depending on how much money the state collects from taxes.

If the numbers hold, the LAO says California could have as much as $21 billion in its main savings account, or about 10 percent of all general fund revenues and transfers.

Gavin Newsom, California, Budget Surplus, Tax Rebates
California Govenor Newsom said the state's taxpayers will likely receive a 2022 tax rebate due to a projected budget surplus. Above, Newsom (C) buttons his jacket as he prepares to take a photo with state and local leaders. Justin Sullivan/Getty Images