Silicon Valley tech boom lifts California’s dreary budget view

California’s coffers are now full thanks to the cash earned by the technological stock market boom.

The Legislative Analyst’s Office of California announced on Wednesday that the state’s budget for the upcoming fiscal year is approximately balanced, citing improvements to the tax system and a spike in corporate and personal income tax receipts brought on by Silicon Valley’s thriving tech and artificial intelligence industries.

According to a report released by the LAO, stock pay alone at four significant technological businesses accounted for about 10% of the state’s total income tax withholding in the first half of 2024. These businesses include Apple Inc., Nvidia Corp., Alphabet Inc., and Meta Platforms Inc.

California’s economy, which is regarded as one of the greatest in the world, is susceptible to severe booms and busts due to its reliance on its wealthiest citizens. Nearly half of California’s personal income tax revenue is paid by the top 1% of earners.

Alphabet, Amazon.com Inc., Apple, Meta, Microsoft Corp., Nvidia, and Tesla Inc. are the so-called Magnificent Seven giant tech companies. Their current 56% gain this year is more than double the S&P 500 Index’s gain.

According to LAO deputy Brian Uhler, “we could see a pretty significant reversal in the revenue gains that we’ve had over the last year or so if sentiment around Nvidia were to change quickly.” A little decline in Nvidia’s stock may have a revenue impact of billions of dollars.

After California’s legislature authorized a $211 billion spending plan in June for the fiscal year that started on July 1st, which had to cover a projected $27.6 billion gap, the balanced budget projection was released.

Governor Gavin Newsom and the state legislature will use the Legislative Analyst’s Office report as a guide for creating the budget for the next fiscal year. Early in January, Newsom is anticipated to present his first budget proposal.

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According to the LAO, high-income Californians’ incomes have increased recently despite the state’s labor market and consumer spending being tepid. The bounce in income tax receipts has been comparable. This recovery in income tax revenues is being driven by the recent stock market rally, which calls into question its sustainability in the absence of improvements to the state s broader economy.

The influx of corporate tax revenue was likely the result of changes in state tax rules, including a suspension of the net-operating-loss deduction and a $5 million limit placed on how much businesses can claim for research and development.

Even with the improved outlook, increases in state spending are anticipated to surpass increases in revenue. California expenditures are set to grow at a pace of 5.8% compared to 4% for revenues.

There s really no new capacity for new commitments in our assessment here, said Gabriel Petek, the legislative analyst for the state of California. The LAO assessment reflects deficit projections in the three budget cycles following next year. We estimate there to be pretty significant operating deficits emerging in the range of $20 to $30 billion per year.

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