California could collect $5 billion less in tax revenue than previously expected, state finance officials said Monday.

The new projection comes as inflation continues unabated and talk of a recession grows louder. There’s disagreement among economists and politicians about the overall health of the economy; some point to the GDP, which has shrunk for two consecutive quarters as evidence of a recession, while others cite the still-abundant jobs and low unemployment levels.

But in a state with a progressive tax structure, where the wealthy pay the biggest share, experts warn that revenues aren’t always a great way to measure the economy. These high-income individuals get much of their money from stocks and other investments, which are subject to volatility.

The Legislative Analyst Office measures revenue based on the “Big Three” taxes: personal income, sales and corporate.

In May, when the state released its economic projections, analysts noted California’s “unprecedented revenue growth over the last two years.” They forecast a 20% hike in 2021-2022, following a 30% rise the year before. But the rapid influx of funds wouldn’t last for long, they warned.

“Such a boom is very unlikely to continue,” they said. “In fact, evidence is growing that this period of rapid economic growth could be coming to an end and that an economic slowdown may be on the horizon. Consistent with this evidence, our May revenue outlook incorporates a heightened risk of recession over the budget multiyear.”

Now, the projection is even more grim.

There is a 70% chance of revenues falling below those projected by the Budget Act, the new forecast says. The office’s best guess is that they will land about $5 billion below projection. But researchers also acknowledge a large element of unpredictability — that collections could land anywhere from $15 billion above projection to $25 billion below.

“Much of the fiscal year… lies ahead of us and there remains significant uncertainty about how much the state ultimately will collect,” they noted.

Brian Uhler, the legislative analyst who authored the new projection, cautioned against drawing overly strong conclusions from the revenue expectations.

He noted that in California, many high-income residents’ incomes are tied to the stock market and other volatile investments. These incomes play a large role in the state’s revenues.

“Obviously, our revenues are tied to the state’s economic health… it’s not a perfect relationship, though, and a large part of that is because a significant portion of our revenue comes from a small percentage of very high income taxpayers,” Uhler said. “The stock market and the economy don’t necessarily move in the same direction.”

A report from the Brookings Institute found that during the Great Recession, state revenues plunged.

“Sales taxes were the first to fall, but income taxes ultimately fell harder and faster,” the report said. “At their low point in the second quarter of calendar year 2009, state taxes were 17 percent below their level one year earlier and personal income taxes were 27 percent lower.”

Last week, the Legislative Analyst Office reported a drop in the California unemployment rate from 4.3 to 4.2%, the latest in a series of dips since May 2020 that have brought the figure from over 16% to just above pre-pandemic levels. The state added 19,900 jobs in June, and has added a total of 2.6 million jobs back to the economy.

But the recovery has slowed over recent months, and the 19,900 new jobs was the lowest figure since September. In February, the Golden State added 135,000 new jobs.

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