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This update post reruns our Fiscal Outlook revenue forecasting models using newer revenue and economic data that has become available in recent months. We then compare the new estimates to projections in the 2024-25 Governor’s Budget. These updated estimates are for the state’s “big three” revenues only. They do not reflect an update of the projected budget deficit. We will update our assessment of the budget condition as part of our analysis of the May Revision.

Revenues Likely to Fall Below Governor’s Budget Assumptions. Our forecast continues to suggest there is significant downside risk to state revenues relative to the Governor’s Budget. Specifically, our forecast is $19 billion below the Governor’s Budget across the 2022-23 to 2024-25 budget window. That being said, there is still significant uncertainty about how much revenue the state ultimately will collect. It is entirely possible that revenues could end up $8 billion higher or lower than our estimate for 2023-24 and $20 billion higher or lower for 2024-25.


Monthly Tax Collections Falling Short of Governor’s Budget. Through April, income tax collections have fallen about $3.5 billion short of Governor’s Budget projections. Similarly, corporation tax collections are down almost $2 billion. Sales tax collections are down about $1 billion through the end of March.

Corporation and Sales Tax Revenues Declining. Recent shortfalls in corporation and sales tax collections reflect an underlying weakness in these revenue sources. So far this year, corporation tax collections are down over 15 percent from last year—the fourth-largest year-over-year drop in collections in the last four decades. Similarly, in the fourth quarter of 2023, “core” taxable sales (a seasonally adjusted measure that omits fuel and certain online sales) dropped by 4 percent—the fifth-largest quarterly decline in the last four decades.

Income Tax Revenues Growing, Buoyed by Recent Stock Market Rally. In contrast, income tax collections have shown some signs of improvement—although they remain well below the recent high point of 2021-22. For example, income tax withholding currently is growing at an annual rate of 5 percent. Our forecast now expects total income tax revenue to rise 8 percent in the current year. This improvement comes against the backdrop of mounting economic headwinds: a steady rise in the state’s unemployment rate, a continued dearth of investments in California businesses, and ongoing inflationary pressures. The most likely explanation for why income tax collections have advanced despite economic headwinds can be found in one of the few economic bright spots for the state: stock market performance over the past six months. Between October 2023 and March 2024, stocks rose over 20 percent, among the fastest rallies in history. Unlike other stock market rallies, however, the recent run-up has not occurred alongside broader improvements in the state’s economy that would further boost income tax revenues. Without such broader improvements, income tax collections are unlikely to continue to grow at the current rate into the budget year.


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