This time last year, there was excitement and possibility over how to spend a record $97.5 billion budget surplus, a shocking figure coming at the end of a bruising COVID-19 pandemic. But this year, excitement has turned into a fight over what not to cut as the state stares down a $31.5 billion budget gap.
How did this budget whiplash happen? To understand how the state could, in one year, have a revenue swing of about $128.5 billion requires a look at how the state raises money for the general fund — the big pot of money that funds most state programs — and a few other complicated aspects of how California juggles completing budget requirements.
Where does all of California’s general fund revenue come from?
California collects taxes to fund state programs. The kinds of taxes the state relies on to fill its coffers has changed over time, and that has increased revenue volatility. The state’s major revenue sources have shifted from retail sales and use taxes making up the bulk of major revenue to personal income taxes.
Here is a breakdown of some of the major revenue sources:
Personal income tax
California has a progressive income tax, where the state’s top earners pay at a higher rate and provide a bulk of that tax revenue. Over the years, income taxes have become the largest major source of general fund money. Capital gains — money made from investments such as stocks — is also taxed, but that stream of revenue is highly volatile. We’ll talk more about that in a moment.
Corporate tax
There is a flat 8.84% tax on the gross taxable income of businesses and corporations doing business in California, excluding some types of…
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