California Budget ChallengeAbout Next 10Budget Overview

Budget Basics

State Budget Trends

Income to the State's General Fund grew dramatically between 1998 and 2007 in large part due to an economic boom in technology and housing construction. Public spending kept pace and, in some years, even exceeded revenue.

The financial crisis of 2007-2008 and subsequent economic recession caused dramatic reductions in state income and state spending. In 2008, California’s budget gap was projected to be $40 billion as a result of the Recession and funding for most state programs was cut dramatically.

Proposition 30, passed by voters in 2012, raised tax rates on the wealthiest Californians and raised the sales tax by a quarter of a percent. Proposition 55 in 2016 expanded those income tax increases to 2030, but the sales tax increase expired at the end of 2016. The Proposition 30 income tax increase generated $6.7 billion in 2015-16, and the top 1 percent of families paid 77.2 percent of the total increase.

As the economy has recovered, California has largely restored funding to the programs that were cut and the state’s budgetary health has greatly improved. The Rainy Day Fund (mandated by Proposition 2 in 2014) had approximately $17 billion at the start 2020-21 fiscal year. As the state’s fiscal health has improved, the budget discussion has moved largely from which programs to cut to which programs to fund, while still preparing for an inevitable economic downturn. By February 2020, the nation experienced over 10 straight years of economic expansion—outpacing the longest economic expansion in modern history.

The onset of the COVID-19 pandemic in March 2020 caused significant disruption to California as much of the economy shut down and the state faced a $54.3 billion budget deficit by the time the 2020-21 May Revision was released in May 2020. General Fund revenues declined sharply, and the state was forced to withdraw funds from the Rainy Day Fund for the first time since it was established in 2014. The federal government passed a number of COVID-19 relief bills that delivered much needed aid to Californians during the crisis, including supplementary unemployment benefits, and offset spending cuts to areas such as education that would have otherwise occurred. Prior to the pandemic, the unemployment rate in California was at a historic low of 3.5% and unemployment peaked at a record 16.4% in April and May 2020.

Fortunately, the state has rebounded more quickly than expected as the pandemic waned in early 2022. General Fund revenues soared resulting in a forecasted $31 billion surplus in 2022-23, and unemployment fell to 5.4% as of February 2022. However, the recovery has been uneven, with lower-income Californians faring worse than higher-income ones.

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