By Maxwell Adler and Eliyahu Kamisher | Bloomberg
The rally in technology stocks has created so much wealth in California that it has helped the state fill its coffers.
California’s budget for the coming fiscal year is “roughly balanced,” the state’s Legislative Analyst’s Office said on Wednesday, citing a surge in corporate and personal-income tax revenue driven by Silicon Valley’s booming artificial intelligence and tech sectors, as well as changes to the tax code.
“In the first half of 2024, stock pay alone at four major technology companies accounted for almost 10% of the state’s total income tax withholding,” the LAO said in a report. Those companies are Nvidia Corp, Alphabet Inc., Meta Platforms Inc. and Apple Inc.
Because of its reliance on its richest people, California’s economy — which is considered among the largest in the world — is sensitive to extreme booms and busts. The top 1% of California earners pay nearly half of the state’s personal income-tax collections.
A gauge of the so-called Magnificent Seven mega tech companies — Alphabet, Amazon.com Inc., Apple, Meta, Microsoft Corp., Nvidia and Tesla Inc. — is up 56% so far this year, more than twice the advance of the S&P 500 Index.
“If sentiment around Nvidia were to change quickly, we could see a pretty significant reversal in the revenue gains that we’ve had over the last year or so,” said Brian Uhler, a deputy with the LAO. “It could be billions of dollars of revenue impacts from even just a correction in Nvidia’s stock.”
The balanced budget projection comes after California’s legislature in June passed a $211 billion spending plan for the fiscal year that began July 1 that had to fill what was an estimated $27.6 billion shortfall.
The Legislative Analyst’s Office report will help guide Governor Gavin Newsom and the state legislature to craft a budget for the upcoming fiscal year. Newsom’s initial budget proposal is expected in early January.
Spending Versus Revenue
California revenues were elevated by an unexpected corporate tax windfall that was injected into state coffers this summer, the LAO said. The forecast projects that tax collections are on track to beat expectations by $7 billion during the period starting July 1, 2023, and ending June 30, 2026.
“Despite softness in the state’s labor market and consumer spending, earnings of high‑income Californians have surged in recent months,” the LAO said. “Income tax collections have seen a similar bounce. 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.
Despite the more positive picture, gains in the state’s spending is expected to outpace revenue growth. 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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