Business & Economy

What stock market swings can mean for California's budget

A trader works on the floor at the closing bell of the Dow Industrial Average at the New York Stock Exchange on February 5, 2018 in New York.
A trader works on the floor at the closing bell of the Dow Industrial Average at the New York Stock Exchange on February 5, 2018 in New York.
BRYAN R. SMITH/AFP/Getty Images

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The stock market just had one of its worst weeks in years. That volatility should be concerning to Californians — even those with no money in the market — because it can have an outsized impact on the state's budget.

"Our revenues can fluctuate pretty dramatically with changes in the stock market," said Chris Hoene, executive director of the California Budget and Policy Center.

California's Legislative Analyst's Office estimates that about 8 percent of the state's General Fund revenues comes from taxes associated with capital gains, such as growth in the stock market. If the stock market has a bad year, so does California's budget.

Hoene said Californians can be somewhat reassured by the state's rainy day fund. It has been growing in recent years, thanks in part to a booming stock market.

"If this is just some short-term correction, the fact that we're still in overall good economic conditions will likely still mean that the state's revenues are pretty healthy," Hoene said. 

It's not yet clear whether this recent volatility could turn out to be a footnote in another otherwise strong year for the stock market, or if it could be the precursor to a significant downturn.

Cal State University Channel Islands economist Sung Won Sohn said after years of sustained growth, a dip in the stock market is not surprising — but last week's swings were unusual.

"The direction doesn't bother me. It's overvalued. Of course we should have some correction," he said. "But the speed and the volatility, that's what's bothering me." 

Sohn said if stock market losses continue, sectors of California's economy that rely on spending by the wealthy could take a hit.

In good years for the stock market, "they spend on real estate, they are more generous with charitable giving and they buy more luxury goods," he said. And in bad years, when the stock portfolios of wealthy Californians take a hit, we can expect to see the state's sales tax revenue go down too.