In recent days, the US stock market has shown signs of weakness, with persistent uncertainty casting a shadow over California’s budget outlook. However, experts believe that the ongoing growth of the stock market this year could serve as a buffer against these challenges.
After the Dow Jones Industrial Average dropped more than 1,000 points on August 5th, the California Department of Finance noted that market volatility is not uncommon.
H.D. Palmer, the chief spokesman for finance and economics for Governor Newsom, mentioned in an email to the Epoch Times that stock market fluctuations are a normal occurrence, continuously impacting the state government’s revenue due to the significant role of capital gains and other stock market-based activities in California’s personal income tax.
California’s tax revenue heavily relies on capital gains taxes and stock options, and the impact of stock market fluctuations on the state budget can be substantial – as seen in the deficit caused by the stock market decline in 2022. Governor Newsom had previously explained during a press conference on budgetary challenges that California’s tax revenue highly depends on personal income taxes, including capital gains taxes, which fluctuate significantly with changes in the economy and stock market.
While California’s capital gains tax revenue hit a record high in 2021, subsequent years saw a significant decrease, leading to a gap between revenue commitments (budget) and tax revenue. Even though there is an expected income growth of about 5% in the coming years, any economic downturn could result in reduced tax revenue.
The nonpartisan Legislative Analyst’s Office has also emphasized the impact of stock market volatility on state tax revenue in reports issued this year, as well as in 2015 and 2005, noting that market instabilities harm revenue forecasts, making accurate predictions more challenging.
Currently, California faces a $73 billion fiscal deficit compared to last year’s $31 billion deficit.
Palmer highlighted that the two key indices with the most impact on California are the S&P 500 and the Nasdaq indices, as many businesses traded in these markets are centered in California. The recent downward trend should not cause significant harm to the California treasury.
Following a 1.84% drop on August 2nd, the S&P 500 index fell by 3% on August 5th, with the Nasdaq Composite index down by 3.43% on the same day after a 2.44% drop on August 2nd.
Despite these fluctuations, after months of steady growth, as of the market close on August 5th, the Nasdaq showed a year-to-date increase of 9.7%, while the S&P 500 index was up by 9.35%.
Palmer stated that predicting future income based on a few days of market dynamics is challenging, and he suggested that if the Federal Reserve lowers interest rates in the next meeting, the situation might change.
Raymond Sfeir, Director of the Anderson Economic Research Center, also believes that despite recent market declines, there has been substantial overall market growth for several months. He mentioned that although some may have suffered losses in recent days, others are still making profits.
Sfeir pointed out that the unexpected job data indicates a slowing labor market, but overall economic conditions remain strong. He stated that there are no signs of an imminent recession.
He particularly highlighted the Federal Reserve’s strategy of maintaining high interest rates to control inflation, which could slow job growth. However, Sfeir believes this deliberate strategy may not necessarily lead to issues.