Excitement over artificial intelligence is bringing much-needed revenue to California. It hasn’t, however, created any more jobs so far, leaving experts anticipating a gloomy economy in the coming year.
In the first four months of the fiscal year, personal income tax collections totaled $6 billion over what was assumed in the budget, according to the State Controller’s Office.
“Much of these gains are really being driven by the handful of AI firms and AI-adjacent firms, which are all making billions of dollars of investments in data centers and extending extraordinary compensation packages to other key employees,” Legislative Analyst Gabriel Petek said, while briefing reporters on his office’s annual fiscal outlook last week.
While corporate income tax and sales tax revenues so far this year have come in below budget estimates, Petek called income tax collections, which he said have been coming in double digits over expectations, ‘a source of strength.”
“The best we can tell is this really does reflect the very strong exuberance or enthusiasm around AI and the investments going on there,” Petek said.
What’s unclear is whether this enthusiasm is contributing to California’s economy as a whole.
“The question becomes, and it's really a fairly crucial question: How sustainable are these trends?”
The LAO’s forecast discourages lawmakers from relying on these heightened tax collections to balance the budget— and in fact, laws requiring the state to put unanticipated revenue toward schools and reserves means that almost all of the income tax windfall from this year is already spoken for.
That leaves policymakers working to fill an estimated $18 billion deficit, as the LAO predicts expenditures will continue to climb next year and revenues to drop amid ongoing economic headwinds of high interest rates, low consumer sentiment and tariffs.
“What we see is pretty lackluster economic performance, with basically no net payroll job growth this whole year,” Petek said.
That includes declining job growth in the tech sector — despite all the investment happening there.
“In terms of state job numbers overall, our top line, we haven't had any net job growth in the state so far this calendar year, and that's also true in the tech sector,” Brian Uhler, deputy legislative analyst in the LAO, said last week. “So whatever advances are happening in that sector, we're not seeing it necessarily in jobs being created.”
A State Affairs analysis of data from the Bureau of Labor Statistics found that, while payroll in the tech sector has risen dramatically since 2022, the number of employees in the industry has not — indicating that those in the industry are seeing higher pay, but that the industry itself isn’t growing.
In fact, tech employment has declined since 2022. Thomas Ash, an economist with the UCLA Anderson Forecast, said at a fall forecast last month that that decline has contributed to the state’s overall bleak economy.
“Since around 2022, 2023, there's been these tech sector layoffs we’re all hearing about,” Ash said.
UCLA’s forecast predicts that tech jobs will eventually recover, but not until late next year.
“It’s going to take a bit of time for it to start going back onto that upward trajectory,” he said.
He predicts that growth in the tech sector will continue through 2027, largely driven by AI investment. However, he said it's unclear how much of the promise of AI technology will actually translate into economic growth.
“We hear a lot of things about AI and its potential to boost growth in the economy,” Ash said. “But it’s really not that clear, and there’s a lot of uncertainty about how that will materialize, how long it might take.”
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