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Anticipated State Budget Deficit Worsens

California State Capitol in Sacramento

A new Legislative Analyst Office (LAO) report shows tax revenue falling well below projects. The agency projects a new California budget deficit of $78 billion. 

The deficit will likely cause the state to dive into reserve funds and cut spending at a level not seen since the Great Recession. 

Why is there a Budget Deficit? 

We are in our second year of budget deficits after experiencing some of the highest budget surpluses in state history. You're not alone if you feel like you're on a roller coaster. 

Different factors drive the deficit and the overall volatility of our state's budget. 

  • The tax structure is dependent on capital gains revenue. The era of tech IPO booms provided windfalls. The market has slowed, resulting in less revenue.
  • Legislators grew expenditures.
  • The loss of middle- and high-income earners leaving the state. 

In sum, legislators overcommitting on spending during the good years with a volatile tax structure brings us to where we are today. 

Next Steps

Governor Newsom's administration has already called for a spending freeze in all state agencies to prepare for the most significant deficit in state history. 

The spending freeze will include all non-vital financial purchases from state entities, such as: 

  • Avoiding new contracts 
  • Canceling non-essential travel 
  • Avoid purchasing non-essential technology or transportation equipment 
  • Reevaluate expensive IT projects

While lawmakers would prefer to dip into rainy-day funds rather than make massive spending cuts, it's evident that the state will likely have to do both. 

Impact on Commercial Real Estate

Ripple effects from the budget shortfall will impact our industry. 

Tax incentives for energy efficiency, state investment in adaptive reuse, and other program funding could be on the chopping block. 

Additionally, local budgets will see less money from the state and may look to new local taxes to protect revenue.

It could mean more political fights for our industry as we push back against new taxes targeting properties. 

Stay connected with us at BOMA on the Frontline for the latest news on the budget and more impacting our industry. 

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