California Faces $68 Billion Deficit Amid Steep Revenue Decline

California is facing a $68 billion budget deficit, the state’s nonpartisan fiscal analyst announced on Thursday, signaling a “serious” financial challenge for the Democratic-led government heading into an election year.

The Legislative Analyst’s Office said a revenue decline this year “similar to those seen during the Great Recession and dot‑com bust” was largely responsible for the sobering projection. Absent a sudden turnaround, Gov. Gavin Newsom and his fellow Democrats in the Legislature would face the state’s biggest budget challenge since the early 1990s, undercutting national messaging by the governor, who has depicted California’s emergence from the Covid-19 pandemic largely as an economic success.

California has been in a downturn since 2022, and state finance officials had been warning of a darkening fiscal outlook, the report noted. But the state was late to recognize the full extent of the plummeting revenues because of a decision to delay its tax filing deadline until mid-November of this year to give residents leeway as they recovered from a series of catastrophic storms last winter.

The state’s tax system is prone to wide swings because of a heavy reliance on the taxation of capital gains and the personal income of high earners. For those residents, a steep 2022 decline in the stock markets resulted in heavy losses, which translated into lower tax revenues in returns filed through last month.

Also partly to blame, the legislative analyst found, is the federal government’s effort to control inflation. As the Federal Reserve has increased key interest rates, borrowing has become significantly, and abruptly, more expensive for businesses and home buyers, which in turn has worsened unemployment and depressed business startups in California.

“Home sales are down by half,” the legislative analyst reported, “largely because the monthly mortgage to purchase a typical California home has gone from $3,500 to $5,400.” Tech companies have also been hit hard, the report found, with an 80 percent drop since 2021 in the number of California companies that have gone public. (In past years, initial public offerings have provided a noticeable boost to state coffers.)

As a result, the report found, the state has added nearly 200,000 workers to its jobless ranks since last year, and the unemployment rate has risen to 4.8 percent from 3.8 percent, nearly a full percentage point higher than the national unemployment rate.

The $68 billion deficit projection is a California record in terms of raw dollars, though the state faced a larger gap during a recession in the early 1990s when measured as a share of overall spending. State leaders passed a $225.9 billion overall spending budget this summer, and the projected deficit represents roughly a 30 percent hit.

The prevalence of remote work in California initially helped the state weather the pandemic with less financial pain than had been expected; in early 2022, analysts predicted that the state would bring in nearly $100 billion more than it was committed to spend.

In June, however, the governor cautioned that the state faced a revenue downturn and that its full scope would not be clear until late fall, after the postponed tax receipt deadline. H.D. Palmer, the spokesman for the California Department of Finance, said that the state would face “a significant challenge with the 2024 budget.”

Mr. Newsom is required to send his budget proposal to state legislators next month.

As California’s fiscal doldrums were becoming apparent last week, legislative leaders said the state was prepared to deal with the projected deficit without cutting core programs. Toni G. Atkins, the Senate president pro tem, noted that the forecast was “not welcome news,” but that the state also had “record reserves” to cover the shortfall.

The cuts should be manageable if the state dips into the substantial reserves that it has amassed during flush times, cuts one-time spending and trims some major line items such as school funding, the legislative analyst suggested. But the Legislature will be forced to make some difficult choices, as deficit years often compel an array of interest groups in Sacramento to jostle with each other to protect their own funding — or to avoid additional fees or taxes on their members.

The deficit is likely to force significant cuts in an election year and challenge the state’s national image.

“California dominates,” Mr. Newsom told Gov. Ron DeSantis of Florida last week in a debate on Fox News. “It’s the fifth-largest economy in the world.”