For years, states like California and New York had plenty of cash in the form of tax revenue, but now with declining populations, the states are struggling to adjust to new budget constraints.
Key Details
- California Governor Gavin Newsom has enjoyed a healthy government budget for most of his career in office—approving record spending amounts and still having enough left over to send $1,00 checks to residents.
- Without COVID funding and a declining tech industry in the state, California now faces a $32-billion deficit, resulting in necessary cuts to climate change programs and delayed funding for other initiatives, Bloomberg reports.
- The Sunshine State is an extreme example of a problem affecting 16 other states in the union, partly due to population shifts in the U.S.
- These states have focused their tax efforts on income rather than other methods of tax revenue. In states like Florida and Texas, where sales tax brings in more revenue, governments are less dependent on residents’ income.
- While California and New York see revenue declines, Texas and Florida enjoy more income.
Why it’s news
States must readjust to new tax bases as the U.S. population shifts southward. Texas and Florida are among the fastest-growing states, while California and New York have seen more residents leave.
States that focus their tax revenue on sales also benefit from increased consumer spending in recent months. Around a dozen states with sales tax have seen more than a 5% increase in tax revenue, Bloomberg reports.
Changing populations are also playing a role in evolving tax revenue. California and New York each had around a 294,000 resident reduction in 2022, while Florida and Texas gained around 888,000 new residents.
“Part of what’s going on is changes in population—people are moving,” senior policy director at the Committee for a Responsible Federal Budget Marc Goldwein says. An additional factor is “the reliance on capital gains taxes and other taxes from very high earners who have large fluctuations in their income. So much of those capital gains are in California and New York, which are the center of tech and the center of finance.”
Other examples
California is not the only state with high income-tax rates facing declining revenue. Hawaii’s governor recently cut $1 billion from the state’s budget to balance it. The state has a top income-tax rate of 11%.
In April, the Island State had a 25% decline in tax revenue. Around 37 other states had a decline in that same month, Bloomberg reports.
The other side
While the increased population has certainly helped Florida and Texas’ tax revenue, the states’ income may not last. Despite high inflation, spending is at a new high, but it is uncertain how long Americans can maintain this level of spending. The states also saw an increase in revenue due to inflation, which is gradually slowing.
If the U.S. were to enter a recession, spending would most likely decline, leaving these states with a smaller budget.
“No state would be shielded from the fiscal impacts of a recession,” says Pew Charitable Trusts’ Justin Theal.