(Bloomberg) -- California is likely to face a $68 billion deficit in its next fiscal year as income tax revenue plummets, marking the second consecutive year of shortfalls that could lead to cuts to key safety-net programs, according to the state’s budget adviser. 

The projected deficit, which is double the size of last year’s shortfall and the largest in the state’s history, comes after an “unprecedented” downward revision to estimated tax receipts, the state’s Legislative Analyst’s Office said in a report released Thursday. The LAO, as the agency is commonly known, said tax receipts last year fell $26 billion short of earlier estimates and forecast a cumulative $155 billion deficit through 2028.

“There probably will be some difficult choices coming because of those multiyear deficits down the road,” California Legislative Analyst Gabriel Petek told reporters at a briefing.

The Federal Reserve’s interest-rate increases over the past two years have hampered the state’s economy, leading to higher borrowing costs, dwindling home sales, and smaller investments for California businesses, the LAO said in its forecast. The most populous US state’s economic slowdown has resulted in a 25% decline in estimated income-tax payments in 2022-2023, according to the LAO. In particular, Silicon Valley has seen an 80% drop in new California companies going public in 2022 and 2023 compared to 2021. 

Read More: California’s $32 Billion Deficit Adds to Economy’s Woes 

The state’s fiscal outlook has been complicated by a seven-month extension on its income-tax filing deadline that was granted to those affected by severe winter storms in 2023. The state over allocated tens of billions of dollars, mainly to schools, based on mandatory budget formulas tied to faulty revenue forecasts due to the delayed tax deadline.

The budget crunch is tied to the state’s wealthiest residents, who contribute half of California’s personal income tax revenue. The aftermath of a 2022 stock market downturn and high interest rates has hit top earners hard, echoing challenges faced during historical market downturns. Because of that reliance on its richest people, California’s economy, which is considered the fifth largest in the world, is sensitive to extreme booms and busts. Following the dot-com crash in the early 2000s, income-tax revenues plummeted nearly 30%. 

Petek recommended Governor Gavin Newsom declare a fiscal emergency, a procedure that would allow the state to tap into some of its rainy day funds, though he advised lawmakers to preserve up to half of the $24 billion available in budget reserves. 

“The state’s reserves are unlikely to be sufficient to cover the state’s multiyear deficits — which average $30 billion per year under our estimates,” Petek said in the report. “As a result, preserving a substantial portion — potentially up to half — would provide a helpful cushion in light of the anticipated shortfalls that lie ahead.” 

Newsom, a Democrat, in January will present his budget proposal for the upcoming fiscal year that begins in July 2024. The governor and state legislators reached a $311 billion budget deal this past June for the current fiscal year which covered a $32 billion shortfall and at the time they set aside $38 billion of reserves. However, that budget agreement included funding cuts to the governor’s signature climate change programs and zero-emission vehicle push.

“When this year’s budget was passed in June, the Administration cautioned that California still faced a revenue downturn driven by a declining stock market, high interest rates, and increased inflation in 2022,” HD Palmer, a spokesperson for Newsom’s finance department, said in an email. “The full scope of that revenue decline has only been revealed late this fall after this year’s unprecedented delay in tax receipts.”

(Corrects reference in second paragraph to say last year instead of current fiscal year in a story originally published on Dec. 7)

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