Report

Q&A: 2021-22 Budget, State Revenues & the Ongoing Needs of Californians

Policymakers are preparing to make decisions on the 2021-22 state budget — and just as there are signs the pandemic is starting to ease in California. Still, data and experience show the economic and health effects of the recession will linger on for Californians, especially people in low-wage jobs, families in low-income households, and Californians of color. How can policymakers address the challenges and barriers for Californians now and meet their ongoing needs, look beyond this budget year to equitably allocate the state’s resources, and confront the widening wealth and income inequality in our state? 

Our new Q&A shares key information to keep in mind as policymakers make decisions on behalf of Californians and our local communities.

1. Governor Newsom will soon release his “May Revision” budget proposals. What is the May Revision, why is it important, and how does it relate to the 2021-22 state budget that the Legislature will pass in June?

State law requires California governors to revise their proposed budget for the upcoming fiscal year by May 14. This update, known as the “May Revision,” is a key part of the annual state budget process that determines policy priorities and the allocation of resources to support Californians and local communities. Governors use the May Revision to unveil new proposals or to amend or withdraw the policy recommendations they advanced in January as part of their initial proposed spending plan. In addition, the May Revision:

  • Updates the governor’s revenue forecast, which estimates the amount of funding that state leaders will have to invest in public services and systems;
  • Adjusts key budget-related estimates, such as the projected number of K-12 students and the number of people who are expected to receive health care services through Medi-Cal;
  • Revises spending estimates across a broad range of programs and systems, from K-12 schools and higher education to health and human services and the state prison system.

The May Revision gives governors a high-profile opportunity to influence budget and policy decisions by promoting their own priorities for California just weeks before the Legislature’s June 15 deadline to pass the budget bill. The May Revision also sets the stage for budget negotiations in late May and early June between the governor and the leaders of the state Senate and Assembly (collectively known as the “Big 3”), who must reach an agreement on the contours of the final budget. While the 2021-22 state budget will incorporate many of Governor Newsom’s May Revision proposals, it will also reflect many of the Legislature’s own spending and policy priorities.

2. State revenues have been coming in ahead of projections for several months now, despite the pandemic and the recession. Why is that? Who is continuing to do well during this devastating public health emergency, and who has been left behind?

The state’s main revenue sources, the personal income tax, sales tax, and corporation tax, have all performed better than expected for a few main reasons. First, Californians with high incomes — who contribute a large share of personal income taxes due to the state’s progressive income tax system — have largely been shielded from job and income losses during the pandemic and have benefited from the strong growth in the stock market. Additionally, the federal relief to individuals and businesses has buoyed consumer spending and business investment and, in turn, sales tax revenues. Finally, many large corporations have been able to weather the crisis and some have even seen large profit increases.

Meanwhile, Californians in low-paying jobs, and particularly Black and Latinx Californians and women, have borne the brunt of the job and income losses and other hardships. For example, about 3 in 5 Black and Latinx households lost earnings during the pandemic, compared to less than half of white and Asian households. More than 1 in 3 California women lived in households that struggled to pay the bills last fall, and Black and Latinx women were the most likely to live in households that struggled to pay the bills, stay current with their rent or mortgage, and afford enough food.

3. Earlier this year, the governor projected a $15 billion budget “windfall,” and since then state revenues have continued to surge. The federal American Rescue Plan also will bring in another $26 billion in direct fiscal aid to the state. How should the state spend these funds?

In January, Governor Newsom proposed a $165 billion spending plan that included a $15 billion budget “windfall.” Moreover, in recent months state revenues have continued to outpace projections by billions of dollars. These gains are the result of stronger-than-expected economic conditions, the state’s progressive tax system, and the fact that state leaders underestimated revenues in this year’s budget. This also means that state spending is trending back to where it might be expected to be in a normal year. But, this is clearly not a normal period for California and, while economic projections are for continued growth, the state is facing significant needs stemming from the public health and economic effects of COVID-19.

In addition, the American Rescue Plan will deliver $26 billion in direct fiscal aid to the state. These funds are one-time and can be spent over multiple years. 

State policymakers should use unanticipated state revenues and the new federal aid to:

  • Continue to address the ongoing public health crisis;
  • Provide assistance to the households and organizations harmed by the pandemic, particularly people of color that were disproportionately affected;
  • Fill gaps in federal assistance, particularly for people who are undocumented and have been excluded from federal aid;
  • Invest one-time dollars in ways that achieve longer-term impact, such as capacity-building and infrastructure investments in child care, behavioral health, housing, and homelessness, as well as capitalized operating reserves that can support future investments; and 
  • Restructure vital state supports so that they include the people previously excluded because of ableist, ageist, racist, sexist, and classist policies that have blocked Californians’ access to benefits, security, and opportunity.

4. The governor’s January proposal included a lot of “one-time” investments. California is also receiving substantial federal “one-time” funding. Yet, the state and Californians had significant ongoing needs pre-COVID, and the pandemic exposed and created a set of greater needs. What are some key ongoing needs and investments that state leaders need to address?

One-time spending is not adequate to support Californians who struggled to meet their basic health, housing, and child care needs even before the pandemic, with an inequitable burden on Black and brown Californians and those with low incomes. Nor is one-time spending adequate to support critical systems and service providers that face ongoing operating costs and need long-term funding commitments to responsibly budget and plan. Clear needs for boosted ongoing state support include:

  • Investing in local efforts to address homelessness through reliable, flexible state funding at a scale that responds to the scale of the crisis.
  • Addressing housing affordability by focusing on the needs of California’s low-income renters — through direct assistance, robust legal aid and enforcement, and affordable housing production.
  • Expanding comprehensive Medi-Cal coverage to all undocumented Californians who are otherwise eligible, with special urgency to cover seniors, and ensuring that all income-eligible Californians have access to nutrition assistance regardless of immigration status.
  • Providing ongoing funding for local public health departments to ensure they can respond to COVID-19 and other threats to population health.
  • Bolstering funding for mental health care and substance use treatment and expanding the behavioral health workforce.
  • Addressing the long-standing underfunding of subsidized child care to ensure all families have access to affordable care and providers are paid fair rates.

State leaders need to be bolder in committing to ongoing support — while also boosting support to a level that meets the scale of need — for the systems and services Californians rely on to meet basic needs and that are vital to public health and well-being. State leaders should seek to increase revenues in equitable ways and make structural changes to revenue and budget policies to ensure ongoing investments can be made to support Californians.

5. California is home to tremendous wealth yet the needs of Californians in low- and middle-income households are vast and Californians of color have been blocked from economic and health opportunities for generations. Why has there been so little urgency among state policymakers to consider new revenues to address ongoing needs and confront the widening wealth and income inequality that preceded and was exacerbated by the pandemic?

Raising new state revenues to support ongoing investments is often an uphill battle, even when there are significant needs for Californians and communities. This year, several factors are further dampening the sense of urgency among policymakers for new revenues. The better-than-expected revenues the state has been receiving — largely due to the continued prosperity of wealthy households — and the influx of federal relief funds have given state leaders more options to balance the budget for the upcoming fiscal year. In subsequent years, options may be more limited to balance the budget, and policymakers may need to consider how to increase revenues, reduce spending, or a combination of these and other strategies. Additionally, the strong revenue growth has raised concerns that revenues are approaching the state’s constitutional spending limit, known as the “Gann Limit.” If this limit is exceeded, policymakers must spend revenue over that limit in specific ways, so they lose the flexibility to spend those funds to best address the needs of Californians. The looming gubernatorial recall likely creates even more hesitancy among state leaders to advance tax policy changes. 

These factors combine to create an especially challenging year for the prospect of raising revenue. However, many of the needs faced by Californians — particularly for Californians of color, who have been disproportionately affected by the health and economic consequences of the pandemic — existed long before this crisis and will exist long after if the state does not make the investments required to address those needs. State policymakers can take steps that raise revenues to support those investments and make the tax and revenue system more equitable for all Californians, not just the wealthy few.