February 6, 2017
We now have preliminary data concerning personal income tax (PIT), corporation tax (CT), and sales and use tax (SUT) collections for January 2017. These are California's "Big Three" General Fund taxes: generating almost all of that fund's revenues. The preliminary January data is subject to change.
Summary: Positive January Revenue Results. Positive January results for PIT quarterly estimated payments more than made up for withholding falling somewhat shy of the administration’s projections. Overall, the PIT exceeded projections by $497 million. Moreover, CT collections exceeded the administration’s projections by $187 million. SUT collections were $21 million above the projections. Combined, receipts from the state's "Big Three" taxes exceeded the administration’s projections by $705 million.
January Budget Resets Projections. The Legislature based the 2016-17 budget plan on the administration’s May 2016 revenue estimates. Underlying those estimates were the administration’s monthly revenue projections. We reported on how actual collections compared with those monthly projections in our August through December revenue tracking posts. The administration’s longstanding practice is to develop new monthly projections that underlie the Governor’s January budget revenue estimates. These new monthly projections reflect actual results for August through November and revised administration projections for the remainder of 2016-17 and 2017-18.
Big Three General Fund Taxes $705 Million Above January Projections. Figure 1 summarizes January income tax receipts based on preliminary tax agency cash reports. As shown in the figure, state income taxes came in $684 million above the administration’s new projections. This positive result was the combination of $497 million from the PIT and $187 million from the CT. In addition to the income taxes shown in Figure 1, SUT also was above January projections, but only by a small amount ($21 million). Below, we walk through some of our key perspectives on January revenue collections. (The table at the end of this post provides detail on the January revenue results.)
Strong Results from PIT Estimated Payments. Estimated payments make January an important revenue month. (Estimated payments are quarterly payments made by individuals and businesses on expected taxable income for which there is no withholding, such as realized capital gains on sales of stocks and other assets.) January 2017 estimated payments beat administration projections by $664 million, or 13 percent.
Changes in Monthly Calendar Makes Year-Over-Year Withholding Comparisons Challenging. Each year, months start on different days. This is important for revenue collections because the starting day of the month can change the number of Employment Development Department (EDD) processing weekdays in that month. For example, the EDD collected withholding on 20 days in January 2017 compared with 19 days in January 2016. The variation in collection days makes year-over-year comparisons in withholding challenging.
Administration’s January 2017 Revenue Estimates Reflect New Withholding Projection Methodology. The administration’s new monthly projections reflect a reworked model for projecting withholding receipts. The model attempts to better reflect these variations in collection days. Consequently, the administration’s new revenue estimates projected that withholding in January 2017 would be $6.5 billion, $625 million higher than it projected for the same month in its May 2016 estimates. Compared with the new January 2017 estimates, withholding collections fell short in January by $302 million. Compared with the previous May 2016 estimates, however, withholding collections exceeded projections in January by $323 million.
Year-to-Date, Withholding Tracking Administration’s 2016-17 Projection. Another way of assessing withholding trends is to compare year-to-date growth with the administration’s projections for the entire fiscal year. The administration’s new January 2017 revenue estimates assume that withholding in 2016-17 will grow 6.7 percent over 2015-16 levels. Through the first seven months of 2016-17, withholding is up 7 percent over the same period the year prior, essentially tracking the administration’s full-year projected growth rate.
The administration’s new monthly projections revised their expectations for January 2017 CT collections downward by $75 million. January 2017 CT receipts beat these new projections by $187 million. The result was the combination of collections exceeding projections by $131 million and refunds coming in $57 million less than the administration expected. As we discussed in our November revenue tracking post, it is possible that changes in Franchise Tax Board processing may have accelerated some refunds from the second half of 2016-17 to the first half.
The sales tax was just above the administration's new projections for the month: $2.79 billion, versus the $2.77 billion projected.
In our January 2017 Overview of the Governor’s Budget report, we stated that the administration’s estimated PIT growth for the upcoming fiscal year (2017-18) seemed too low. We did not, however, cite concerns with the administration’s overall revenue estimates for the current fiscal year (2016-17). Through the first seven months of 2016-17, revenues are tracking the administration’s estimates for the Big Three taxes, as shown in Figure 2.
The table below provides additional detail on Big Three tax collections, relative to the administration's new January 2017 monthly revenue estimates.
For information on other January General Fund revenue collections, see the Department of Finance's Finance Bulletin, which was posted here on February 16, 2017.
This post, originally released on February 1, 2017, was revised on February 6 to reflect updated income tax collection data for January. The earlier income tax totals were displayed in the table here. The post was further revised on February 8 to reflect preliminary sales tax collection reports for January.
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