(Bloomberg) – The rise in technology stocks has generated so much wealth in California that it has helped the state fill its coffers.
California’s budget for the next fiscal year is “virtually balanced,” the state Legislative Analyst’s Office said Wednesday, citing an increase in corporate and personal income tax revenue driven by the growth of manufacturing industries. , in addition to changes in the tax code.
“In the first half of 2024, just payments in shares of four large technology companies accounted for almost 10% of the state’s total income tax collection,” the LAO said in a report. These companies are Nvidia (), Alphabet (), Meta () and Apple ().
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Because of its dependence on the richest people, California’s economy — considered one of the largest in the world — is sensitive to big ups and downs. The richest 1% of Californians pay nearly half of the state’s personal income tax collections.
An index of the so-called seven mega technology companies — Alphabet, Amazon (), Apple, Meta, Microsoft (), Nvidia and Tesla () — is up 56% so far this year, more than double the advance of the S&P 500 index.
“If sentiment around Nvidia changes quickly, we could see a pretty significant reversal in the revenue gains we’ve had over the last year,” said Brian Uhler, one of the LAO analysts. “This could represent billions of dollars in revenue impacts just from a correction in Nvidia shares.”
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The balanced budget projection comes after the approval in June of a $211 billion spending plan for the fiscal year that began July 1, which needed to cover an estimated $27.6 billion deficit.
The Legislative Analyst’s Office report will help Gov. Gavin Newsom and the state legislature craft a budget for the next fiscal year. Newsom’s initial budget proposal is expected in early January.
Expenses versus Revenue
California’s revenues were boosted by an unexpected increase in corporate tax collections that were injected into the state’s coffers this summer, according to the LAO. The forecast projects that tax collections will exceed expectations by US$7 billion during the period from July 1, 2023 to June 30, 2026.
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“Despite weakness in the state’s job market and consumer spending, earnings for high-income Californians have soared in recent months,” the LAO said. “Income tax collections also showed a similar recovery. 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 in the state’s broader economy.”
The influx of corporate tax revenue was likely the result of changes to the state’s tax rules, including the suspension of the deduction for net operating losses and a $5 million cap on how much companies can claim for research and development.
Despite the more positive scenario, gains in state spending are expected to exceed revenue growth. California’s expenses are expected to grow at a rate of 5.8%, compared to 4% for revenues.
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“There really is no new capacity for new commitments in our assessment here,” said California state legislative analyst Gabriel Petek. The LAO assessment reflects deficit projections in the three budget cycles following next year. “We estimate that there will be quite significant operating deficits in the range of $20 to $30 billion per year.”
© 2024 Bloomberg L.P.
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