Today, April 15, is "tax day," a key deadline for payment of personal income taxes. The agency cash tax tracker here on this blog and other daily tax trackers online report all of the taxes collected and refunds claimed more or less in real time, on or near the day that collections and claims occur. (The agency cash method we use generally is the timeliest method of state budgetary revenue tracking.)
Yet, illustrative of the growing complexity of California's budget and tax system, personal income taxes collected this week will not all be booked to a single year in the state's annual budgetary accounting system. While the majority of personal income taxes collected this week likely will be booked to the current state fiscal year (2014-15), some will be booked to last fiscal year (2013-14) and other tax dollars collected this week will essentially be booked to the next fiscal year (2015-16). (The 2015-16 fiscal year technically starts on July 1.)
Why is this so? The answer is the state's complex system for annual revenue accruals.
Accruing This Week's Tax Collections
This Fiscal Year? Most tax collections are booked to the fiscal year in which they are collected. This essentially is the "default" accrual method. Personal income tax withholding collected daily generally flows to the current fiscal year, as do most other tax collections.
Last Fiscal Year? In California's budgetary revenue accrual system, some Proposition 30 and 39 dollars are booked to the prior fiscal year, which is currently 2013-14. Therefore, when a high-income taxpayer makes his or her final or extension payment on 2014 capital gains and other tax liabilities this week, a portion of those payments effectively will be accrued backwards to 2013-14 under the "net final payment" accrual method authorized in the annual state budget act (for 2014-15, see Section 35.21 on page 687).
Next Fiscal Year? Under the same accrual method, a portion of this week's tax collections will be booked to the future. That is because high-income taxpayers, taxpayers with business income, and others will make their first quarterly estimated payments on 2015 income this week. A portion of the Proposition 30 tax payments received this week from high-income Californians will essentially be booked to 2015-16 under the same net final payment accrual method authorized in Section 35.21 of the annual budget act.
Accruals, Complexity, and Uncertainty
The complexity of the accruals described above has a number of implications for state budgeting:
- Delays Forecasting. It is not immediately obvious which part of this week's taxes will be booked to which fiscal year. In fact, it will take our office about a month (until about the time of the May Revision) even to develop a new estimate of fiscal year revenue totals based in part on this week's collections.
- Delays Really "Closing the Books" on Fiscal Years. California receives around 16 million personal income tax returns each year. Given the volume and complexity of California tax returns, some delays in data reporting are understandable and likely inevitable. Many of the largest tax returns are not received until the "extension deadline" for filing them in October, even though the vast majority of payments are received earlier by the April 15 deadline this week. So, for the 2012 tax year, state tax agencies were able to start sending fiscal forecasters like ourselves solid information on what was in tax returns in early 2014, a few months after those important extension returns were received. By late 2014, the data exhibits we received from state tax agencies had solid information on 2012 tax returns. Under the state's revenue accrual system, this meant that by late 2014, there was enough information for the 2011-12 fiscal year to be "closed" (meaning, in our thinking, that the chances of further adjustments to budgetary fund balances due to changes in 2011-12 revenue and expenditure data were small). We have begun to receive data on 2013 tax returns and will receive better data as this year progresses. Accordingly, until that 2013 tax return data is essentially final, 2012-13 fiscal year budgets remain, in our view, "open" and still able to affect the state's General Fund fiscal situation.
- Delays Knowing About Proposition 98 Requirements. The state's revenue booked to each fiscal year, including the change in revenues booked to one fiscal year versus the next, is a key factor in determining the state's Proposition 98 school funding requirements. Accruals can affect those requirements by hundreds of millions of dollars or more. Therefore, all of the long delays in closing fiscal years described above mean that it takes longer to nail down annual requirements for funding schools, the largest portion of the state budget. Because 2013-14 revenues are still uncertain, therefore, the state's Proposition 98 funding requirements and other budget calculations with large significance for the budget in the current and prior years are still evolving.
Difficult to Change Revenue Accruals. For all of these reasons, revenue accruals make more complicated an already complex state budget situation. As elected leaders finalize the state's 2015-16 budget plan, they face uncertainty not only about revenues and expenditures next year, but about what they were for the three fiscal years prior to 2015-16. In prior publications, our office has suggested undoing some of the key recent changes in revenue accrual policy and transitioning to a simpler, more logical system based primarily on when tax dollars are received. Such a change, however, would not be easy, and it likely would not be quick as changing accrual policies would require planning and could affect Proposition 98 funding requirements either positively or negatively, depending on how the changes are implemented.
Links to Selected Prior LAO Revenue Accrual Publications.
- Discussion of 2011 administration accrual proposal, including history of accrual accounting in California state government.
- November 2012 Fiscal Outlook (see page 3).
- 2013 budget discussion.