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Austin, Tx vs Sacramento, Ca. Who's got higher taxes? Who has a budget surplus?

Texas Teaches California a Budget Lesson

Sacramento has a $22.5 billion deficit, Austin has a $32.7 billion surplus. Here’s why.

By The Editorial Board, WSJ

Jan. 11, 2023 6:34 pm ET


Gov. Gavin Newsom last year touted a $100 billion budget surplus as evidence of California’s progressive superiority. He was less triumphant Tuesday when announcing a $22.5 billion deficit in the coming year, a contrast to Texas’s record $32.7 billion surplus.


Give Mr. Newsom partial credit for acknowledging that the state’s highly progressive tax code is partly to blame for the state’s deficit. “What is consistent is the inconsistency of our revenue on the basis of a progressive tax structure,” he said. California’s coffers grow and shrink with capital gains since the top 0.5% of taxpayers pay 40% of the state income tax. The state taxes capital gains of millionaires at a 13.3% rate, on top of the federal 23.8% top rate.


California’s general fund revenue surged to $210.5 billion last year from $146 billion in 2019 as near-zero interest rates inflated asset prices. But as the Federal Reserve lifted interest rates, stock prices of high-flying tech companies tumbled. Market discipline is spurring Silicon Valley firms to thin their workforces.


State income-tax revenue is projected to be $25.4 billion lower than last year’s forecast. But note that income-tax collections are expected to be only $2.2 billion lower than last year, and total general fund revenue is projected to grow by $582 million. California’s problem, as usual, is that Democrats baked too much spending into their budget baseline.


They expanded Medicaid to undocumented immigrants over the age of 50, enacted universal pre-school and school lunches, extended paid family leave by two weeks, and boosted climate spending by $10 billion. Now Mr. Newsom is reprising the role of an indulgent dad who suddenly has to tell his children no más.


Democrats and their interest groups are whining about his proposed spending “cuts,” which are merely smaller increases. Mr. Newsom says federal largesse from last year’s infrastructure bill and Inflation Reduction Act will offset alleged cuts to climate and public-transit spending, and no doubt he’s right.


But it’s no small irony that Texans are now benefitting tremendously from the growing global demand for oil and gas, which Mr. Newsom and friends are trying to eliminate. Texas’s oil and gas tax revenue has grown $5.3 billion since 2019 owing to higher commodity prices and increasing production in the Permian basin.


Yet Texas’s budget isn’t nearly as dependent on oil and gas as California’s is on Silicon Valley. Much of Texas’s surplus this year owes to surging sales-tax revenue from inflation and population growth—i.e., Californians moving to Texas and spending their tax savings.


Mr. Newsom claimed Tuesday that California has a more “fair” tax system than the Lone Star State and that Texans pay more in taxes. This is disinformation. According to the Census Bureau, California’s per capita state tax collections ($6,325) were second highest in the country in 2021 after Vermont. Texas’s ($2,214) were second lowest after Alaska.


Texans pay higher property taxes, but they pay no income tax while California taxes its middle-class earners at a punishing 9.3% rate on income of $61,214 for a single filer. California’s gas tax is more than 2.5 times Texas’s, and its state and local sales taxes are on average 0.62% higher. California’s budget problems will grow as more of its rich and middle class move to lower-tax states like Texas.

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