Updated "Big Three" Revenue Outlook (May 2026)

Revenues Are Surging but Appear Unsustainable. Our updated forecast of revenues from the state’s three largest taxes (income, corporation, and sales) shows a $25 billion upgrade over the Governor’s Budget across the budget window (prior year to budget year.) This upgraded outlook is almost entirely attributable to higher expectations for income tax collections, which are being driven by enthusiasm around AI and the related stock market boom. As such, we continue to caution that these surging revenues likely are not sustainable. This suggests it would be prudent to approach the state budget as if we are at or near a revenue peak.

Improvement in Budget Bottom Line Will Differ. We further caution that our revenue update does not imply that the May Revision will show an equivalent improvement in the state’s budget condition. Under the state’s constitutional budget formulas, each additional dollar of General Fund revenue triggers roughly $0.50 in required spending—primarily for K‑14 education—meaning the net improvement would be closer to $12 billion. The May Revision also will reflect other budgetary changes and updated estimates from the administration, including revenue estimates that will differ from ours.

Stock Market Boom Continues to Fuel Strong Collections. Income tax collections continue to be boosted by a roaring stock market—which is up 75 percent in the last three years alone. December and January income tax payments to the Franchise Tax Board (which reflect non-wage income like investment and business earnings) were up more than 50 percent from a year ago. April income tax payments continued this trend, posting nearly 50 percent growth over last year. The state has seen similar growth only a handful of times, with notable examples coming during asset price booms in 2000 and 2021.

Booms Almost Always Come With an Eventual Bust. As we discussed in our Fiscal Outlook, several historically-reliable signals suggest the stock market currently is overheated and due for a correction. Little has changed about our assessment since then. In fact, the market has continued to make new highs. It is now hard to ignore that the stock market appears, on its face, to be in a speculative bubble, rivaled only by the dot-com boom and the Roaring Twenties. Such speculative episodes almost always end in dramatic reversals. 

Near-Term Revenue Strength Should Be Treated as Temporary. With the high risk of a reversal in both the stock market and state revenues, we advise against treating the current level of revenue as a sustainable foundation for multiyear budgeting. Instead, the state should be prepared for revenues to be tens of billions lower within one or two years. 

Strongly Caution Legislature Against Using Reserves and/or Taking on New Debt. One way the Legislature can prepare is to avoid using reserves or taking on new debt. Reserves and borrowing are intended to address budget shortfalls and should not be used during a revenue boom. Despite revenue upgrades, the Governor’s January budget relied on the use of $10 billion in reserves and nearly $6 billion in new borrowing. These proposals point to an imbalance in the state’s budget structure. In past cycles, with similar conditions, the eventual revenue downturn has necessitated more abrupt and disruptive budget adjustments. While the May Revision will reflect new proposals, we recommend the Legislature not rely on reserves and borrowing.