California businesses added 16,000 jobs in December, following a relatively sluggish November (+20k jobs). Though businesses continue to hire, recent reports send mixed signals. From July to December, businesses reported adding 230k jobs. At the same time, 100k fewer Californians reported having work.
Based on the most recent revenue and economic data, we currently estimate that collections from the state’s “big three” taxes—personal income, sales, and corporation taxes—are likely to fall below the Governor's Budget assumption of $200 billion in 2022-23.
Despite worrying signs in some parts of the economy, the labor market remains steady. Seasonally adjusted weekly UI claims held steady over the last several months at between 40,000 and 50,000 claims per week. This level is in-line with UI claims seen during periods of sustained economic growth.
Cannabis tax revenues have declined for five straight quarters. One part of last quarter’s revenue decline is the lost revenue from the recently eliminated cultivation tax. Despite this policy change, revenues from the retail excise tax declined faster than ever before, indicating that other factors continue to drive down revenues.
Although October colletions from the state's “big three” tax revenues—personal income, corporation, and sales taxes—came in far ahead of Budget Act assumptions, this is not indicative of better than expected revenue performance for 2022-23 overall. Instead, a closer look at the data shows that the recent trend of revenue weakness continued in October.
2022-23 California income tax withholding is running about 2 percent below last year, despite relatively strong job growth and wage gains that typically drive withholding trends. In this post, we take a closer look at this divergence and explain how smaller employment bonuses and limited IPO activity likely are causing recent weakness in tax withholding.
While it was a positive development, the October inflation report did not significantly alter our assessment that there is a high risk of inflation remaining elevated in the budget year and beyond.