California Braces for $50B+ COVID-19 Impact on 20-21 Budget - Essay Sample

Introduction

The COVID-19 crisis has had significant impacts in the normal functioning of government, with both the federal and state governments having to make the unfavorable but necessary adjustments to facilitate a smooth running of the operations. COVID-19 has affected a wide range of areas, health and economy being some of the most affected areas. In the 20-21 financial year budget, the state of California is expected to adopt two budgets that are estimated to be more than 50 billion dollars less from the existing 225 billion dollars general fund budget. With the reduction in the general fund budget, this paper intends to give recommendations to the governor regarding the revenue and expenditures of the state.

Impact of the COVID-19 pandemic on Taxes

Personal Income Tax

Personal income tax is the tax imposed by the state government on all forms of income, including salaries and wages. Personal income taxes in the state of California contributes significantly to the total amount of revenue collected by the state. As such, any decline in the amount of personal income taxes that the state collects implies that the state will experience budget constraints and will therefore not be able to meet their obligations effectively. In the wake of the Coronavirus, thousands of California's citizens have lost their jobs, and thus, tax withholdings have also stopped. As a result of the COVID-19 pandemic, a lot of employers are finding it hard to efficiently run their operations since overall, the return on investments has significantly declined. Thus, companies are opting to lay-off most of the employees to ensure that the businesses are profitable or are not incurring losses. With the massive loss of jobs, the implication is that the state will have fewer people to impose the personal income taxes, which consequently means that the overall amount of personal income taxes will considerably be low compared to personal income taxes of the financial years prior to the pandemic (California Economy and Taxes).

Although there is a likelihood that the state of California might slowly start to rebuild its economy after the Coronavirus is maintained to a certain level just like all other states, there is a likelihood that even after the state’s normalcy returns, companies will not be able to rehire other employees while others will completely shut down their businesses. In the long term, there is a high likelihood that the COVID-19 pandemic will lead to a massive decline in the personal income taxes collected by the State of California as a result of the high unemployment and closure of businesses that is expected as a result of the pandemic.

Moreover, the State of California has allowed for the deadline extension in the filing of taxes, which implies that unlike in the previous years where the month of April is characterized with a high amount of the personal income taxes, this year's month of April will be characterized by an extremely low amount of personal income taxes. Further, the outbreak of the Coronavirus has considerably affected the compliance of people in filing their personal income taxes since people are prioritizing on their survival and not on their tax obligations. As a result of the call to social isolate and keep social distance, many people are finding it difficult to comply with their tax obligations especially in areas where the tax filling systems are not fully digitalized (California Economy and Taxes).

Capital Gains Tax

Capital gains tax is the tax collected on the profit made out of selling a property whose value has appreciated over time. In the state of California, capital gain taxes is one of the significant sources of revenue for the state. Because capital gains taxes are directly related to the performance of the stock market, it is often difficult to predict the amount of capital gains taxes. Due to the COVID-19 pandemic, the performance of the stock market has drastically declined, and therefore, it is expected that the capital gains taxes will also decrease dramatically. According to the 2019-2020 and 2020-2021 budgets in the state of California, taxes from the capital gains were projected to be 30 billion dollars with the assumption that the stock index for the S and P 500 stock would remain relatively flat in 2019 and 2020 and then gradually increase in 2021 (State of California department of finance). While the S and P stock index had remained relatively flat and at par with the budget projections prior to the COVID-19 pandemic, the stock index has drastically declined way below the projected value in the budget after the COVID-19 epidemic, leading to lower capital gains taxes. It is likely that the capital S and P indexes will continue to reduce as long as the outbreak is not resolved, implying that the Capital gains taxes will also continue to fall drastically (California Economy and Taxes).

Property Tax

Property tax is the tax paid on a property to the state government by an individual or a corporation. The state of California allows the authorities to waive penalties incurred as a result of late payment of property taxes only if the late payment can be associated with a reasonable circumstance such as the COVID-19 pandemic. Since the COVID-19 pandemic has affected every property owner in one way or another, they are likely to be relieved, and the penalties for the payment after 10th April waived, which would imply that the overall property taxes collected by the California state will decrease (California Economy and Taxes). Moreover, the value of the real properties is likely to reduce as a result of the decline in the revenues gained by the taxpayers. Because of the decrease in the value of real properties, many property owners will be able to reduce their property tax assessment in 2021 and the years after that while others will be able to claim for reliefs, which would lead to a decline in the property taxes (California Economy and Taxes).

State Share of Sales Tax

Sales taxes are the taxes imposed by the state government on the sale of goods or services. Because of the uncertainties surrounding the Coronavirus pandemic, the spending patterns of the consumers have changed for the worst. Consumers are no longer spending on goods and services that are not deemed necessary, and thus, the sales taxes that would otherwise be collected from the sale of such goods and services is now unavailable. Moreover, social distancing and stay at home calls have considerably limited the consumer spending patterns, since people cannot go out and seek the goods and services by themselves. Overall, the COVID-19 pandemic is likely to decrease the sales taxes collected in the state of California (California Economy and Taxes).

Bank and Corporation Tax

Bank and corporation taxes are taxes that are directly imposed on income that is generated by the banks and corporations. The COVID-19 pandemic has significantly affected the revenue generated by banks and corporations, where banks and corporations are making extremely low profits while others are making losses for lack of customers and investors during this pandemic period (California Economy and Taxes). Because the bank and corporation taxes collected by the state government are proportional to the profits generated by the banks and corporations, it implies that a lower profit would translate to a lower tax collection and vice versa. Therefore, the likelihood that the COVID-19 pandemic would reduce the banks and corporation taxes in the state of California is high.

Impact of the COVID-19 pandemic on Areas of General Fund Spending

Health (Medi-Cal)

The Medi-Cal program is an expensive healthcare program in the state of California that provides free or very low-cost healthcare coverage for people with limited resources and low incomes. Because the pandemic has significantly affected the revenue sources of the state, leading to a more than 50 billion dollars cut in the budget, general fund spending on healthcare is likely to also be affected. The high rates of unemployment and high rates of COVID-19 infections are likely to lead to a dramatic increase in the number of people enrolling in the Medi-Cal program, which would further strain the already strained general fund of the state and force the state to make cuts on other areas of general fund spending such as the education (California State Portal).

Human Services (TANF)

With the high rates of unemployment that have resulted due to the COVID-19 pandemic and the calls to stay home and keep social distance, more and more people would need the Temporary Assistance for Needy Families (TANF) in the state of California. While the state government of California had established a sufficient fund to meet the TANF needs, the shortfalls in the budget due to the pandemic will significantly affect its ability to meet some of the human services. Because of the impacts of the epidemic are extensive and affects a lot of people, the state government might be required to increase its TANF funds allocation and broaden the eligibility criteria for the for those who qualify for the TANF funds in order to meet their multiple needs (California State Portal).

Higher Education (UC, CSU)

Higher education institutions in California such as the California State University (CSU) and California University (UC) have already experienced a drastic decrease in the revenue and finances, owing to the fact that students are no longer within the universities and classes have now switched to online. Moreover, the rates of new enrollments into the universities are expected to be low since a lot of the students prefer a one on one interaction with the instructor and not online, but this is not possible at the moment due to the precautionary measures to keep social distance and stay at home. Because higher education is not the most prioritized area at the moment, the budget allocation to the universities is likely to be cut down, with the funds being allocated to other areas of priority (California State Portal).

K-12 Education including Community Colleges

Coronavirus has affected the normal functioning of the K-12 education, including community colleges, with all the K-12 education institutions and community colleges remaining closed to prevent further infections. Because a number of children and students from low-income areas depend on schools for nutritional, the closure of the schools means that such students are suffering in terms of their dietary needs. Thus, it would be critical to cut the budget for the K-12 education and community colleges and use the funds in areas such as human services (California State Portal).

California Department of Corrections

The spread of Coronavirus in the correctional facilities has been a significant problem in the state of California. Keeping social distance has proved to be difficult since most of the correctional facilities are congested with prisoners, and most of the facilities are shared. While some correctional facilities are releasing some of the elderly inmates due to their high risk in contracting the virus, more measures need to be put in place. This implies that the department of corrections would require more budget allocation to be able to control the spread of the virus inside the correctional facilities.

Works Cited

California Economy and Taxes. “Income Tax Withholding Tracker” (2020). https://lao.ca.gov/LAOEconTax/Article/Detail/463

California Economy and Taxes. “March 2020 State Tax Collections” (2020). https://lao.ca.gov/LAOEconTax/Article/Detail/456

California State Portal. “California Coronavirus (COVID-19) Response”(2020). https://covid19.ca.gov/

California State Portal. “California Department of Education” (2020). https://www.cde.ca.gov/nr/ne/yr20/yr20rel34.asp

State of California department of finance. “Budget” (2020). http://www.dof.ca.gov/Budget/