Analyst says state could end up with $12 billion to $40 billion

California legislative analyst Gabe Petek.
In a UCSB Economic Forecast webinar this week, California legislative analyst Gabe Petek delivered some good news for the state.
His prediction?
“A very large revenue windfall, very large, historically large,” he said during Thursday’s presentation on the 2021-22 Fiscal Outlook for California.

If the state had no policy changes, Mr. Petek said there would be a $26 billion windfall, but he added that it could be as much as $40 billion or as little as $12 billion.
He said that one of the reasons the state had a better revenue experience this year is because “the state’s fiscal structure worked in its advantage.”
Mr. Petek explained further. He said the economic downturn from COVID-19 disproportionately affected people without a college education, who experienced the most job and income loss, but most of California’s tax revenues are generated from its high income taxpayers.
Forty-five percent of California’s personal income tax is from the top 1% of people producing income.
Mr. Petek said that if there were to be a $26 billion windfall, he thinks half of it should go to a budget reserve or supplemental pension payments, and the other half to “one-time purposes aimed at reducing the economic hardship” from the pandemic.
“A reasonable question would be, ‘Well, you have this windfall.. . Why do we have this deficit going forward?’” he said. “In the subsequent years of our forecast, we’re projecting that tax collections will increase at less than 1% a year and that would be slower than it has been in recent years.
“It’s very unlikely that the state will just naturally grow out of this structural deficit problem,” the analyst said. “It’s particularly disquieting at this time to be projecting a structural deficit, one that is growing the way that it is in an expanding economic situation, and that’s the hallmark of a structural problem and it’s something that will most likely require action.”
However, Mr. Petek highlighted the uncertainty of it all and how that makes it challenging to forecast the economy. His team put together a graph measuring the extent of analyst’s disagreement on the economy, and, “We’re at by far the highest we’ve ever been.”
In addition, he said it’s important to consider a successful vaccine and its rollout.
He predicts by the third or fourth quarter of 2021, the administration could end the emergency declaration at the federal level.
Dr. Peter Rupert, the executive director of the UCSB Economic Forecast Project and a professor of economics at UCSB, pointed out a few facts and figures he believes play a role in the state and national economy.
“Six to 7,000 people a week are still applying for unemployment insurance,” Dr. Rupert said. “Many, many businesses who started out maybe doing OK with the PPP and CARES program, they’re starting to get hurt a bit more, and these layoffs are still occurring.”
He said based on statistics, retail shops aren’t going away because people still want to go to the store and get out of the house, but they’ll still be affected by e-commerce. In addition, the leisure and hospitality sector got hit the hardest by the pandemic, with close to 40% unemployed at the worst points of COVID-19. Now 16% are unemployed.
Dr. Rupert said the state is “basically seeing a third (coronavirus) wave,” with April being the first, July the second and November the third at record-high case numbers.
Visit efp.ucsb.edu for more information about the UCSB Economic Forecast Project.
email: gmccormick@newspress.com