Red Texas is flush, blue California has a deficit, but it’s more about economics than politics
Red Texas is flush, blue California has a deficit, but it’s more about economics than politics
It’s that time of year when governors tell their states how much money they think they have and how they want to spend it.
This week, we learned the two most populous states in the country are in very different fiscal places right now. In California, Gov. Gavin Newsom is looking for ways to patch a $23 billion deficit. Meanwhile, in Texas, Gov. Greg Abbott is thinking up ways to spend a $33 billion surplus.
You’re probably going to hear those numbers come up in a lot of blue-state-versus-red-state partisan bickering over the next few months. But this story is more about this economy than politics.
Every state is kind of like its own special fiscal snowflake, with its own beautifully unique economy and tax structure.
Generally speaking though, “state budgets are doing well,” said Richard Auxier with the Tax Policy Center. “But there is a bit of concern about what’s on the horizon.”
Most state budgets are kinda like your average household budget right now: Income is still rolling in and there’s still some leftover pandemic aid from the federal government, but it feels like a downturn may be coming.
It’s already hit a very big part of California’s tax base, according to Chris Hoene at the California Budget & Policy Center.
“Because we’re a heavy tech economy, it means tech has a disproportionate impact on the state’s revenues.”
California depends a lot on a progressive personal income tax, and rich people’s incomes depend a lot on the stock market. So, in 2021, when a bunch of tech IPOs were minting new Silicon Valley millionaires, California ran a big surplus.
But now, with Federal Reserve rate hikes stripping those tech unicorns of their billion-dollar horns, “there just haven’t been nearly as many initial public offerings as there had been in prior years,” Hoene said.
Texas has a growing tech scene of its own, but the state is still much more reliant on its oil and gas industry, which did really well last year after Russia invaded Ukraine. However, that’s only partly why Texas has such a big surplus.
“Because Texas does not have a state personal income tax, it is very reliant on the sales tax,” said Dick Lavine, a budget specialist at the advocacy group Every Texan. “And because of inflation, people were having to pay more for everything they bought, and the sales tax revenues are expected to jump.”
There’s an obvious downside though, Lavine said. Even if inflation means more revenue, it also means all of the goods and services state agencies buy are more expensive too.
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