Legislative Analyst's Office, May 1996

Economic and Revenue Developments

Revenues Up Nearly $1.1 Billion In Current Year

General Fund revenue collections in April from all sources were up $704 million above the January Governor's Budget projection for the month. Given that collections through March were up $380 million, cumulative receipts through April are nearly $1.1 billion above the budget projection.

Sources of the Gain

Most of the gains both during April and for first ten months of 1995-96 are from higher-than-expected personal income tax payments. However, as shown in Figure 1, all three of the major taxes are running ahead of the January forecast.


Large Withholding Gains Imply Stronger Economy

The most positive revenue development over the past several months has been the consistently higher-than-expected levels of income tax withholding payments. April's withholding receipts were 16 percent higher than last April's, while cumulative 1995-96 payments through April are running 9 percent ahead of last year.

Historically, the performance of withholding has been a good general indicator of the state of California's economy. For example, withholding fell sharply in the early 1990s, reflecting the severe nature of the recession that hit California at that time. Similarly, the current withholding gains provide encouraging evidence that the underlying trend in wages is stronger than previously thought. The withholding gains are especially strong in view of the elimination of the top 10 percent and 11 percent marginal state income tax brackets as of this January.

Implications For 1995-96 Revenues

If current tax-related trends continue over the near term, most of the current $1 billion-plus revenue gain would be expected to hold through the end of 1995-96. In fact, a continuation into May and June of the recent trend of higher-than-projected withholding and quarterly prepayments would lead to further increases in personal and corporate tax receipts. Offsetting these pluses, however, are two negative factors. First, personal income tax refunds on 1995 final returns are running higher than expected, and this trend appears to be continuing in May. Second, as indicated above, collections data for early May suggest that much of the $250 million increase in sales taxes during April will be offset this month.

Contact -- Brad Williams -- (916) 324-4942.

Public Safety Has Been
Highest Local Funding Priority

The recession of the early 1990s, combined with the shift of more than $2.5 billion annually in property taxes to schools, has reduced the available revenues to California's 58 counties. At the same time, the recession resulted in increased demand for many social services. As a result, many counties have been forced to reduce the level of services they provide.

Recognizing the difficult financial condition of California's counties and the fact that public safety services could be compromised by the reduction in available resources, the Legislature placed Proposition 172 on the November 1993 ballot. This measure was in turn approved by the voters. Proposition 172 created a permanent, one-half cent sales tax for public safety purposes (generally the sheriff, district attorney, and probation departments). The Public Safety Sales Tax generates more than $1.5 billion for local public safety purposes each year, with 95 percent of this revenue going to counties.

How Has Public Safety Funding Fared?

To see how public safety funding has fared in recent years, we surveyed seven counties (representing 50 percent of the state's population). We found that between 1992-93 and 1995-96 spending for public safety departments receiving Proposition 172 funding increased by an average of 7.9 percent. During this same period, counties' three largest general purposes revenue sources -- the property tax, the sales tax (including Proposition 172 funds), and the vehicle license fee -- increased by a combined total of just 3.2 percent. For comparison purposes inflation during this period -- as measured by the California Consumer Price Index -- increased by 5.9 percent (see Figure 2).

Within public safety departments, sheriffs' department budgets grew faster than all others. Spending on sheriffs' departments increased by 8.6 percent, while spending for other public safety departments covered by Proposition 172 increased by 5.2 percent.

Funding Has Exceeded Minimum Requirements

Despite the slow growth in revenues resulting from the recession and the property tax shifts, counties have maintained public safety spending in excess of the minimum requirements of the maintenance-of-effort provision of the Proposition 172 implementing legislation, Chapter 886, Statutes of 1994 (AB 2788, W. Brown). This statute requires that counties increase spending for public safety departments above the 1992-93 funding level in accordance with growth in Public Safety Sales Tax revenues. Among a sample of 10 counties, spending for public safety exceeded the minimum requirements of the law by an average of 9.3 percent (see Figure 3).

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The Legislative Analyst's Office is located at 925 L Street, Suite 1000, Sacramento, CA 95814.

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