The State, cities and counties in California are in deep financial crisis once again. The shutdown of the economy and the ‘stay-at-home’ orders has caused a collapse of tax revenue at the same time there is a growing demand for government services. Governor Newsom has spent more than $2 billion in taxpayer money in just one month to combat COVID-19. Sales tax revenue is way down and income tax revenue is declining and will fall further as unemployment rises. Many counties and cities rely heavily on meetings, conventions and tourism for tax revenue which has ceased due to travel restrictions.
California’s tax structure is heavily weighted toward high wage earners and their capital gain taxes. A significant percentage of the tax revenue generated from these individuals is based on their capital gains which were over $15 billion in 2019. Those gains are volatile and with the recent plunge in the stock market they become capital losses.
As a result of the collapse in tax revenue lawmakers will be forced to make decisions about spending cuts and tax increases. At the same time tax revenue is steeply declining, some government costs are escalating higher like unemployment insurance and medical care. In four weeks over 3 million filers for unemployment have been processed. Currently the budgets of 12 out of 15 largest cities in the state are underwater. In addition, the state owes over $1 trillion in pension obligations. In the Great Recession of 2008/09 California ran out of money to pay benefits and had to borrow money from the Federal Government to cover unemployment coverage.
In San Diego the Mayor recently told the City Council to prepare for deeper cuts for the fiscal 2021 budget due to massive revenue losses. Estimated losses for the city are more than $300 million and for fiscal year 2020 the estimated tax revenue loss from sales tax and transient occupancy tax is $109 million. Already large regional events have been cancelled in San Diego; the Del Mar Fair, Comic-Con, Padres baseball. The largest loss to the city is transient occupancy tax (TOT) for hotels and vacation rentals, $83 million. The second biggest loss is sales tax revenue, $26 million so far. The projected regional occupancy rate for hotels for 2020 was approximately 77%, in April it is 0%.
In Los Angeles the City Controller stated a revenue shortfall of $231 million for fiscal year 2019/20. For 2020/21 fiscal year tax revenue may decline by approximately $600 million. Much of the loss is due to the decline in hotel transient occupancy taxes. The County Board of Supervisors is forecasting a $1 billion decline in sales tax revenue between March 1 and June 30 the end of the fiscal year. They believe that number could double next year.
In addition to the significant declines in sales and income tax revenue IG forecast a sharp decline in property tax revenue over the next few years as both residential and commercial real estate is priced lower. In these economic times it’s important for property owners to have their tax assessments reviewed annually.