The state budget runs over $350 billion in total spending. State legislators utilize the General Fund, which is derived from roughly $250 billion in state taxes, for discretionary spending and new programs.
The remainder of state expenditures come from state bonds and from state tax revenue earmarked for special funds that have dedicated purposes. Federal grants provide nearly $190 billion more for state programs, with the largest single example being California’s Medicaid program, Medi-Cal.
Where does the money come from?
Most of California’s revenue comes from the income tax, and most of that is derived from a small number of households. The personal income tax supplies roughly 60 percent of General Fund tax revenue, while sales taxes and corporate taxes supply most of the rest.
California’s income tax is steeply progressive, with the top rate being the nation’s highest. The practical consequence is that tax revenue is concentrated in a small number of households. The top 1 percent of tax filers alone pay roughly 40 to 50 percent of all personal income tax, accounting for approximately 30 percent of total General Fund revenue.
This tax revenue surges in boom years and falls during economic downturns. It does so because the income of upper-bracket households derives heavily from capital gains and stock compensation, which swings with financial market outcomes.
As a result, state revenue also waxes and wanes, often decreasing just as the state is tempted to expand spending during a downturn.
Why does the budget experience this boom and bust?
In effect, California’s current tax policy is a leveraged bet on financial markets. In good years, capital gains pour in, and state legislators create new programs to spend the surplus. During downturns, tax revenue falls while the obligations remain.
In this decade alone, the state has seen swings from a budget surplus of $100 billion to a budget deficit within roughly a two-year timespan.
The rainy-day fund created by Proposition 2 in 2014 forces some saving during periods of rising tax revenue, but its capacity is small relative to the negative effect caused by downturns.
Where does the money go?
Two destinations dominate General Fund spending.
1. Education:
Proposition 98 guarantees that K–12 schooling and community colleges receive roughly 40 percent of General Fund revenue.
2. Health and human services:
In recent years California has spent almost one-third of General Fund revenue on Medi-Cal and related programs. This is the fastest-growing area of expenditures.
The remaining quarter of General Fund revenue is dedicated to corrections, higher education, courts, and other social services that most people typically think of as state government’s responsibility.
The composition surprises most readers: Even when universities, parks, California Highway Patrol (CHP), and prisons are combined, the portion of the budget dedicated to them is still smaller than that reserved for education and health care.
Who decides how to spend tax revenue?
Most voters would probably be surprised by how little discretion the legislature has in state spending. Voter-approved expenditure mandates, for example Proposition 98, and federal requirements, such as Medicaid expansion approved by the legislature in 2013, contend with constitutional limits such as the Gann limit imposed by Proposition 4 in 1979.
Meanwhile, caseload-driven entitlement programs pre-commit most spending before legislative debate begins. See FAQ no. 7 on budget constraints to learn why the legislature cannot simply change the budget.
The governor proposes a state budget in January and provides an updated revision in May. The legislature must pass a balanced budget by June 15 or the members will forfeit their pay, due to Proposition 25, passed in 2010.
As a result, much consequential policy ends up enacted through “trailer bills” attached to the budget, which pass by simple majority and take effect as soon as the governor signs them.
