The rally in tech stocks has created a lot wealth in California that it has helped the state fill its coffers.
California's budget for the approaching fiscal 12 months is “roughly balanced,” the state's Legislative Analyst's Office said Wednesday, citing a surge in corporate and income tax revenue driven by the booming artificial intelligence and technology sectors in Silicon Valley in addition to changes within the economy is driven by tax codes.
“In the first half of 2024, stock payments alone at four major technology companies accounted for nearly 10% of the state’s total income tax withholdings,” an LAO report said. These firms are Nvidia Corp, Alphabet Inc., Meta Platforms Inc. and Apple Inc.
Because of its reliance on the wealthiest people, California's economy – considered one in all the most important on this planet – is vulnerable to extreme booms and busts. The top 1% of California's workforce pays nearly half of the state's personal income tax revenue.
A measure of the so-called Magnificent Seven mega-tech firms – Alphabet, Amazon.com Inc., Apple, Meta, Microsoft Corp., Nvidia and Tesla Inc. – have risen 56% to date this 12 months, greater than twice as very similar to the S&P 500 index.
“If the sentiment around Nvidia were to change quickly, we could see a pretty significant reversal of the sales gains we've seen over the last year or so,” said Brian Uhler, a LAO lawmaker. “Even a correction in Nvidia shares could lead to billions in lost sales.”
The balanced budget forecast comes after California lawmakers in June passed a $211 billion spending plan for the fiscal 12 months that begins July 1, closing an estimated $27.6 billion shortfall should.
The report from the Legislative Analyst's Office will help Gov. Gavin Newsom and the state legislature prepare a budget for the upcoming fiscal 12 months. Newsom's first budget proposal is predicted in early January.
Expenses versus income
“Despite the slowdown in the state’s labor market and consumer spending, the incomes of high-income Californians have risen sharply in recent months,” the LAO said. “There has been a similar uptick in income tax revenue. This recovery in income tax revenues is being driven by the recent stock market rally, which calls into question its sustainability if there are no improvements to the state’s overall economy.”
The influx of corporate tax revenue was likely the results of changes to state tax rules, including a suspension of the online operating loss deduction and a $5 million cap on the quantity firms can claim for research and development.
Despite the more positive picture, increases in government spending are expected to outpace revenue growth. California spending is predicted to rise 5.8% while revenue rises 4%.
“Our assessment is that there really is no new capacity for new commitments here,” said Gabriel Petek, the legislative analyst for the state of California. The LAO assessment reflects deficit forecasts within the three budget cycles after next 12 months. “We expect there will be significant operating deficits in the order of $20 billion to $30 billion per year.”
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