Legislative Analyst's Office, May 1998
Revenues Up Sharply
On May 14, the administration is scheduled to release the May Revision to its January budget
proposal for 1998-99. The updated plan traditionally contains revisions to the revenue forecast
and the expenditure plan, taking into account such factors as economic developments and
revised caseload projections. In this update, we highlight recent economic and revenue
developments that will significantly affect the May Revision proposal.
For the third year in a row, the state's General Fund fiscal picture will show a major
improvement in the May Revision. This is primarily because revenues in 1997-98 and 1998-99 will be up sharply, largely reflecting dramatic increases in personal
income tax revenues.
State's Economy Strong
California's economy is growing at the fastest pace since the mid 1980s, with personal income now showing year-over-year gains of 8 percent. While Asia's economic
problems have affected businesses and industries exporting to that region, the broad negative
impacts on California that some had feared have not materialized so far. Other industry sectors
are strengthening in California in 1998--particularly in such areas as home sales, new
construction, and retail spending--giving the economy an added boost in the current year.
Revenues Exceed Expectations
General Fund revenues from the state's major taxes exceeded the January budget forecast by
$1.3 billion in April, primarily reflecting much stronger-than-expected final personal
income tax payments. As Figure 1 (see page 2) shows, income tax payments in April
totaled $5.1 billion, and dramatically exceeded the amounts recorded in April in prior
years. Cumulative revenue receipts through the first ten months of this year are running
approximately $1.6 billion above the January budget estimate. Based on the ongoing
positive trends in the economy and related gains in withholding and sales tax payments, the state
will likely experience further revenue increases in May and June.
How Much of the Current-Year Revenue Increase Is Ongoing? A major issue affecting the
revenue forecast for 1998-99 is the extent to which the extraordinary increase in current-year
personal income taxes is due to one-time versus ongoing factors. While the continued economic
expansion and stock market gains are clearly positive factors for next year's revenues, it also
seems likely that at least some of the extraordinary increase in this April's final payments was
due to a one-time "unlocking" of gains in response to last year's federal tax rate reduction on
long-term capital gains. Thus, a key issue for the May Revision is the extent to which the
current-year revenue gain is assumed to be repeated in the budget year.
Proposition 98 Interaction. In contrast to the previous two years, when upward revenue
revisions were matched by equally large increases to the formula-driven Proposition 98
minimum funding guarantee, it appears that the revenue increases in the current and budget
years will not increase the guarantee. (This is primarily due to the fact that the operative funding
formula for the current year is "Test 2," which is dependent on personal income growth, and
therefore, is not affected by the increase in revenues.) Thus, most or all of the new revenues will
be available for non-Proposition 98 purposes.
We will provide our review of the May Revision, including its economic, revenue, and
expenditure assumptions, following its release next week.
Contact—Brad Williams—(916) 324-4942
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