The Brief

No sooner had Gov. Gavin Newsom cut billions of dollars in spending to close a budget deficit in June than California received an unexpected tax windfall, one that has people in the Capitol speculating about where the avalanche of money came from.

More corporate taxes than expected poured into state coffers this summer, with cash receipts exceeding forecasts by nearly $2 billion since April. An especially big surge came in July, and state officials and accounting experts think the extra receipts came from a small number of companies — most likely one or more Silicon Valley tech firms, with artificial intelligence chipmaker Nvidia a leading candidate.

The influx highlights a growing tension in California between its tendency to further regulate tech companies — the governor has signed six bills governing the use of artificial intelligence so far this year — and its reliance on them for tax revenue.

On a single day, July 16, the state received more than $800 million than expected in corporate tax payments, “by far its single biggest day of collections” for a July going back at least four decades, state deputy legislative analyst Brian Uhler told CalMatters. (He excluded 2020 because the pandemic delayed tax deadlines.)

This July, the Finance Department said it collected about $1.4 billion in corporate taxes, nearly three times the agency’s forecast of $500 million. In June, corporate taxes were $263 million above forecast, and in May, $752 million over. “The July overage was likely due to large payments by a small number of companies and may not necessarily be indicative of overall corporation tax revenue trends,” the department said in its monthly bulletin.

Tax records are confidential, and representatives from both the Finance Department and the Franchise Tax Board stressed that nobody at the state is allowed to discuss details or information from specific tax returns or payments.

But the July influx in corporate tax payments was likely related to changes in state tax rules adopted in June, according to state and accounting experts who spoke with CalMatters. The tax changes, intended to help close the deficit, include a suspension of a deduction businesses can claim to offset profit, called the net operating loss deduction, as well as a $5 million limit on how much businesses can claim for research and development and other tax credits.

It’s possible that companies expecting to have outsized profit realized they owed more in taxes and needed to make large estimated tax payments immediately after the changes were enacted, accounting experts said. Corporations that expect to owe taxes are required to make quarterly estimated tax payments and can incur penalties if the payments are late. State analysts believe the new taxes could disproportionately come from “businesses in riskier or more innovative industries — such as the technology, motion picture, and transportation sectors,” as they put it when the changes were proposed.

In California, a red-hot tech company fits the bill of outsized profits and risky innovation: Nvidia, which is raking in record amounts of money because of the artificial intelligence boom.

As other companies scramble to get ahead in the AI race, they are buying Nvidia’s chips and propelling the company to new heights. On Aug. 28, Nvidia reported second-quarter net income of $16.6 billion, which was more than double its profit from the same period last year — and about the same amount spent by all state and federal campaigns in the last election.

Nvidia’s annual financial report from 2023 shows that it had $1.5 billion in unused California tax credits for research and development. Between the cap on that tax credit and the suspension of the loss deduction the company could have claimed against its rising profit, Nvidia probably realized it would have a larger tax bill, accounting experts told CalMatters. That’s why it may have been the company or one of the companies that made the sizable estimated tax payment to the state.

Nvidia’s most recent quarterly filing provides additional clues: The company paid a total of $7.21 billion in income taxes in the second quarter, a whopping 31-fold increase from the $227 million it paid in taxes in the same period last year. For the first six months of its 2024 fiscal year, Nvidia paid $7.45 billion in income taxes, compared with $328 million in the first half of 2023. Those totals included federal and state taxes. California has a flat corporate tax rate of 8.84% of a company’s net income, while the federal tax rate is a flat 21%.

If Nvidia was largely responsible for the July tax windfall, due to an estimated tax payment, the company likely expects a lot of taxable income this year, said Francine McKenna, an independent financial journalist who writes the Dig newsletter and has taught financial accounting at the University of Pennsylvania’s Wharton business school. McKenna said if that’s the case, and because there’s a limit on how much the company can claim in terms of other tax credits, Nvidia will likely make another sizable estimated tax payment in the third quarter.

An Nvidia spokesperson would not comment. Neither would a spokesperson for Gov. Gavin Newsom.

“I’d expect payments from other companies as well, potentially,” said Brett Whitaker, a former tax executive at Ernst & Young, Nike and Mattel who now teaches corporate tax accounting at Indiana University. “They depend on these credits often to avoid paying tax, so suspending them could drive tax for many.”

Whitaker said most companies try to take advantage of R&D tax credits: “Big Four (accounting) firms have entire teams dedicated solely to this effort.” But he added that the credits are especially commonly used by tech companies and others whose businesses rely on innovation.

It’s hard to tell exactly when those other estimated tax payments will come and how significant they will be, Finance Department spokesperson H.D. Palmer said.

Estimated tax payments are due in April, June, September and January, but those payments are not always made on time so can come in at any time, according to the Franchise Tax Board.

A CalMatters examination of Silicon Valley’s biggest tech companies’ financial filings with the federal Securities and Exchange Commission suggests that some of them may also be affected by the tax changes. That means the companies could make estimated tax payments that could be similar in size to the ones the state received in July.

Apple, Google parent Alphabet and Facebook parent Meta are among the companies whose financial filings show they have past losses, which they could normally deduct, and/or unused research and development tax credits in the state.

As of last Dec. 31, Alphabet had $18.6 billion in old losses in California. The tech giant also had $6.3 billion in research and development credits. As of the same date, Meta had $2.78 billion in past losses in the state, as well as $4.08 billion in unspecified state tax credits from prior periods. And as of Sept. 30, 2023, Apple had $3 billion in research and development credits. All these companies are highly profitable, and whatever deductions and credits they were expecting to use are now either on hold or limited.

According to the analysis of the budget bill that included the tax changes, California’s deduction suspension and tax-credit limits could increase state revenue by $5.95 billion this fiscal year, $5.5 billion the following fiscal year and $3.4 billion the year after that.

The tax changes split state lawmakers mostly along party lines when the governor proposed them in his budget earlier this year. Democrats characterized the changes as necessary, while Republicans decried them as a burden on businesses.

Democratic state Sen. Scott Wiener from San Francisco, a supporter of the changes, said in an emailed statement to CalMatters: “It is important not to read too much into any single month revenue numbers, but we believe that tough decisions we made this year will strengthen the state’s fiscal health going forward while protecting our core programs and benefiting the overall economy.”

Sen. Roger Niello, a Republican from Roseville, an opponent of the changes and a former accountant, told CalMatters he checked with his fiscal staff as well as the Legislative Analyst’s Office about the bigger-than-expected corporate tax payments in July. “It’s reasonable to consider that it’s because of tax changes, but they really don’t know,” he said.”It does appear to be from large deposits from a few companies.”

Niello said the state has disallowed the deduction for operating losses in nearly half of the years between 2008 and 2027, citing a finding by the Legislative Analyst’s Office in a May report. The deductions are supposed to help make taxes roughly even for businesses with similar total profits over the course of multiple years.

Suspending that deduction “appears to be a go-to measure by the state for accounting for revenue shortfalls,” Niello said. “It’s something that businesses cannot rely on now.”

In addition to the tax changes, California tech firms have navigated various legislative fights and new regulations this year. The biggest battle was over a bill to force them to test powerful artificial intelligence models for their potential to enable cyberattacks, the creation of weapons of mass destruction, and other threats to infrastructure. Several big tech companies opposed the legislation, saying it would hinder innovation, while prominent whistleblowers said it would help mitigate the reckless pursuit of tech profits. The measure, from Wiener, cleared the Legislature only to be vetoed by Newsom this past weekend. The governor also signed into law bills that would protect voters from deepfakes and allow victims of doxxing to sue their attackers in civil court.

California Democrats are targeting a handful of vulnerable GOP state legislators in hopes of flipping their seats blue.

What are their chances? Tuesday’s election results will offer an early clue.

Embattled Republicans from Sacramento to San Diego have drawn a crowded field of Democratic challengers. The primary, where the top two vote-getters advance to the general election regardless of party, will decide which Democrats will face off against those GOP incumbents in November.

Democrats in those competitive districts are banking on President Donald Trump’s waning popularity and the impact of his policies — chiefly high tariffs, immigration crackdowns and the war in Iran — to hurt Republicans. To fend off the challenges, GOP incumbents have tried to keep Trump’s name at a distance while appealing to their base of Trump loyalists.

In Riverside County, expect a rematch between Assemblymember Leticia Castillo, a Corona Republican, and Democratic Riverside City Councilmember Clarissa Cervantes, who lost two years ago by a razor-thin margin despite amassing a significant war chest. Tonight’s election will likely foreshadow the results in November, when the two will meet again for a final matchup.

In the Coachella Valley, three Democrats are vying to unseat GOP Assemblymember Jeff Gonzalez of Coachella, who has adopted a more moderate perspective on immigration than his fellow Republican colleagues. Similarly, in three other purple districts, from northern Sacramento County to Orange County, tonight’s election will test the Republicans’ popularity.

Democrats are also playing defense in Southern California: Sen. Catherine Blakespear, an Encinitas Democrat, faces Republican challenger Laura Bassett tonight in the toss-up district in San Diego County.

In some of California’s deepest blue corners, Democrats running for open seats are fighting each other to break through. In the coastal Southern California district that includes Malibu and Santa Monica, half a dozen Democrats are vying to succeed Sen. Ben Allen, who is running for insurance commissioner. In Los Angeles, a fierce five-way race has split some of the most powerful labor unions and Democratic groups to replace Democratic Assemblymember Mike Gipson, who will term out by the end of the year.

In San Diego, the race to replace GOP Sen. Brian Jones, who is also terming out, is a battle between two Republican factions that offers a glimpse into the future direction of the party: Will a moderate San Marcos city councilmember endorsed by Jones be more palatable than a far-right firebrand? We’ll find out.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.

Some elected offices are pit stops. California’s lieutenant governor is one of them.

Voting ends on Tuesday and voters are choosing between an unusually competitive roster of candidates for the No. 2 job in the state, an office few aspire to without one key disclaimer: It’s a step on their way to another job in politics.

The lieutenant governor wields little power beyond stepping in when the governor leaves the state. But it’s been used as a slingshot to the governor’s office before, by Gov. Gavin Newsom and former Gov. Gray Davis, and seeking the office is often a signal that its officeholder has higher political ambitions.

State Treasurer Fiona Ma, Newsom administration official Josh Fryday and former Stockton Mayor Michael Tubbs are the leading Democratic candidates in a top-two primary that will send two candidates on to the November general election. Fryday, who heads volunteer programs for the state, has amassed the biggest treasure chest — nearly $4 million — and is backed by teachers unions and the governor.

Ma, a longtime politician with deep roots in San Francisco, has endorsements from influential labor unions and has raised about $2.8 million. But her run for the second-highest statewide office is shadowed by 2021 sexual harassment allegations that Tubbs supporters have latched onto. Ma has called the allegation “frivolous”, but the state paid $350,000 to settle a lawsuit filed by one of her former employees.

Tubbs was among the first to announce his campaign in 2024. Once a progressive star, he rose to political stardom 10 years ago as a young big city mayor who piloted a guaranteed income program in Stockton. Ousted by a Republican newcomer, his political career seemed to fade and he went on to lead Mayors for a Guaranteed Income, an advocacy organization. It’s his first crack at public office since then, and he’s garnered support from progressive Democrats and the powerful union SEIU California.

Longtime state lawmaker Gloria Romero is the leading Republican. Romero spent 12 years representing east Los Angeles in the state Legislature as a Democrat. She switched parties in 2024.

Higher education at the forefront

The major Democratic candidates have struggled to set themselves apart on policy. Because the lieutenant governor sits on all three college governing boards, each has claimed they would work to make universities build more housing and lower tuition costs. This has included practical solutions from directing Federal Student Aid applicants to food assistance program CalFresh, to more far-fetched ones such as free tuition for in-demand programs such as nursing.

The lieutenant governor also sits on the commission responsible for millions of acres of public land. Fryday thinks identifying more undeveloped land to build student housing on will help lower tuition costs.

Ma wants Cal State universities, which rely heavily on state funding, to find other revenue sources through partnerships with private companies.

At an April candidate debate in Los Angeles, Tubbs said he supports freezing tuition but did not elaborate on how he would make up the loss in revenue.

Romero seeks greater transparency about faculty, salaries and housing allowances and would push for more student representation on the UC Board of Regents.

To set themselves apart, the Democrats have leaned on their distinct backgrounds. Fryday has made clean energy a core part of his campaign as a former executive of a clean energy organization started by billionaire gubernatorial candidate Tom Steyer. Ma has framed the job as another bulwark against the Trump administration. Tubbs, who works as an unpaid economic adviser to Newsom, has focused on affordability and cutting tuition for low-income families.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.

A quiet primary race for state superintendent of public instruction is winding down Tuesday, with no clear front-runner emerging from a wide field of well-qualified candidates for California’s top schools job.

Ten candidates — including several legislative veterans — are vying for the opportunity to oversee the state’s 10,000 public K-12 schools during a tumultuous time. Schools are grappling with AI in the classroom, budget uncertainty, declining enrollment, lackluster test scores and other challenges.

The job itself is also up in the air. Gov. Gavin Newsom in January proposed an overhaul of California’s school governance structure, with far fewer duties for the superintendent. Instead, the State Board of Education, an 11-member body appointed by the governor, and a newly appointed education commissioner would hold most of the decision-making power. The superintendent would act as more of a policy advocate.

The shift would streamline a cumbersome and often opaque bureaucracy, adding transparency and accountability, Newsom said. It would also align California with most other states. Candidates for the superintendent position blasted the proposal, saying it takes away power from voters and concentrates too much control with the governor’s office.

Newsom and the current superintendent, Tony Thurmond, are both termed out this year.

Charter schools are no longer a divisive issue

The race for superintendent — at times, in previous election cycles, one of the most expensive and contentious races on the ballot — has been unusually quiet this year. In the most recent poll, conducted in April, no candidate garnered more than 10% of voters’ support, and 32% of voters were undecided. As of last week, no candidate had raised more than a few hundred thousand dollars. That’s in contrast to the 2018 superintendent race between Thurmond and Marshall Tuck, a former charter school executive, which generated more than $50 million in donations.

But there have been a few surprises in the race. The California Teachers Association and its historic nemesis, the California Charter Schools Association, endorsed the same candidate: Richard Barrera, a San Diego Unified school board member who was little known outside San Diego until this year. Both groups cited his accomplishments on the school board and his commitment to public education.

The dual endorsement shows how much has changed in education debates. For the past two decades, charter schools have been the No. 1 division in the superintendent’s race, generating millions in campaign donations from both sides. This year the subject has barely been mentioned, probably because charter school enrollment appears to have plateaued and both types of schools are now dealing with the same issues.

Another surprise has been the popularity of Sonja Shaw, president of the Chino Valley Unified school board. Shaw made headlines in 2023 when she took on Thurmond over the privacy rights of transgender students, and has made anti-LGBTQ policies the focus of her campaign. In the April poll, she was tied with Barrera.

Other top candidates include: Assemblymember Al Muratsuchi, former head of the Assembly education committee; Josh Newman, former head of the Senate education committee; Anthony Rendon, former speaker of the Assembly and a longtime early education program administrator; Nichelle Henderson, a Los Angeles Community College District board member, and Ainye Long, a teacher in San Francisco Unified.

The nonpartisan position pays $210,460 a year.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.

Californians finish voting Tuesday for who they think can best tackle one of the toughest jobs in the state: insurance commissioner.

The commissioner is responsible for regulating the nation’s largest property insurance market that includes home and auto, plus health, pet, ride-hailing and life insurance, as well as workers’ compensation.

But the hot topic in the past few years as wildfire risk has increased has been home and fire insurance. The next commissioner will face many challenges that include trying to balance property insurance availability with affordability. Some insurance companies that had stopped renewing policies or writing new ones in the past few years are now taking advantage of new regulations that allow them to use new tools in setting their rates. This generally means premiums will rise as the Insurance Department, headed by the commissioner, is likely to keep approving increases in homeowners’ insurance premiums.

The new commissioner will also have to deal with the aftermath of last year’s Los Angeles County fires. Insurance-claim delays and denials are a key part of the slow pace of rebuilding and recovery. State Farm, California’s largest individual insurer, and the FAIR Plan, the state-mandated fire insurance provider of last resort, are both facing lawsuits from homeowners and legal action from the insurance department over their handling of claims from those fires.

The leading Democratic candidates are state Sen. Ben Allen, who will be termed out of the Legislature; Jane Kim, head of the California Working Families Party who served on the San Francisco Board of Supervisors; Patrick Wolff, a financial analyst who has never held public office; and Steven Bradford, the former state senator and assemblymember. Neither of the leading Republican candidates has held statewide public office, either: Stacy Korsgaden, a longtime insurance agent, and Merritt Farren, an attorney who lost his home in the Palisades fire last year.

The candidates CalMatters interviewed mostly agreed on the problems that need to be tackled but proposed different solutions. A few of them have called for increased financial involvement by the state: Kim wants to establish a state authority for wildfires and floods funded by a portion of policyholders’ premiums. Farren wants to create a state reinsurance authority funded by a fee insurers charge their policyholders, something both Kim and Allen have expressed interest in. Bradford said he would study a public-private partnership to help keep insurers writing policies in California.

Consumer advocacy groups and former insurance commissioners say the job is complicated and involves a “brutal balancing act” that takes into account the needs of homeowners, business owners, landlords and renters while keeping insurance companies confident that the rates they’re charging match the growing risk of wildfires in the state.

U.S. Rep. John Garamendi, the Democratic congressman whose district includes much of Contra Costa and Solano counties, was the state’s first insurance commissioner and held the position two different times. He told CalMatters that the commissioner job is “complex, hard, detailed work.”

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.