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Last Updated: 2/4/2011
Budget Issue: January income taxes exceed projections
Program: Revenue
Finding or Recommendation: Provides report on January 2011 personal income and corporation tax collections based on preliminary Franchise Tax Board data. Cautions that the strong year-to-date collection trends may be difficult to sustain through the remaining five months of 2010-11.
Further Detail

This note describes January 2011 personal income tax (PIT) and corporation tax (CT) revenue collections, based on the Franchise Tax Board (FTB) preliminary collections report for the month. (Separately, the Board of Equalization will provide January 2011 sales and use tax collection data in a few days.)

January 2011 Income Taxes Exceed Projections. Combined, PIT and CT collections in the month of January were $438 million over the Department of Finance's (DOF) January 2011 monthly revenue forecast. For the fiscal year to date, PIT and CT collections combined are over $1.2 billion above the amount reflected in the DOF monthly forecast.

Revenue Outlook. With this revenue update, we begin comparing monthly revenue totals to those included in the new DOF January 2011 forecast. The state's year-to-date revenue performance appears fairly strong, and DOF's 2011 economic forecast does not reflect the full benefit of recent federal tax legislation. Nevertheless, there are some notes of caution that we offer when considering the possible future trend of monthly receipts.

  • Uncertainty About CT Over Next Five Months. First, CT collections have been somewhat weak compared to forecast during this fiscal year. In the next five months--from February to June 2011--the updated DOF forecast assumes $6.4 billion of CT collections. By contrast, between February and June 2010, CT collections totaled just $5.4 billion. It may be difficult to hit the forecasted CT target for the upcoming five-month period.
  • Uncertainty About PIT Over Next Five Months. The January 2011 DOF forecast assumes that PIT refunds over the next five months will total $8.5 billion—up $2.4 billion (40 percent) from the same five months in 2010. Accelerated PIT withholding started in late 2009, meaning that 2010 is the first year when most taxpayers had about 10 percent more withheld from their paychecks. Accordingly, it is reasonable to expect that PIT refunds will increase. How much spring refunds will increase is an important question for 2010-11 PIT receipts, and given that this is a new provision, there is significant uncertainty about how to forecast this. If DOF's forecast understates refunds significantly for the next five months, this would make it difficult for PIT collections to hold their year-to-date gains through the rest of 2010-11.

 PIT. January is a major month for PIT receipts, with large amounts of both quarterly estimated payments and withholding. FTB reports net PIT collections of $7.28 billion in January. This is $497 million above the DOF January 2011 monthly revenue forecast. PIT estimated tax payments were $291 million (8.8 percent) above DOF's forecast for the month, and PIT withholding was $167 million (4.5 percent) over the DOF forecast.

The DOF January 2011 monthly revenue forecast was updated based on the Governor's Budget revenue and economic assumptions, but this update did not reflect actual collections for December, a month in which PIT also finished stronger than expectations. Accordingly, based on the positive PIT news for both December and January, year-to-date PIT net collections now are $1.27 billion above DOF's year-to-date forecast.

January 2011 withholding was 1.5 percent higher than withholding amounts in January 2010. This year-over-year growth is depressed due to lower PIT tax rates after the expiration—at the end of tax year 2010--of the temporary PIT increases that were adopted in February 2009. Accordingly, were it not for this expiration, PIT withholding would have grown several percentage points between January 2010 and January 2011.

December and January typically are the two biggest months for PIT withholding, reflecting many firms' payments of bonuses to their employees. January PIT totals also may have been depressed by decisions of firms to pay out bonuses a bit early in late 2010, due to the earlier uncertainty concerning federal tax rates for 2011. This movement of bonus income may have been a key reason behind the 30 percent growth in withholding in November 2010, compared to November 2009.

CT. January is a minor month for CT. FTB reports net CT collections of $362 million in January. This is $59 million below the DOF January 2011 monthly revenue forecast. As with PIT the updated DOF monthly forecast did not reflect December actual collections. For the year to date, CT collections now are $47 million below DOF's updated forecast.

Methodology.The FTB report upon which this update is based is an "agency cash" report. Agency cash differs from "Controller's cash" (reported in monthly state cash flow statements) based principally on the timing of receipts. Agency cash—not Controller's cash—is used for state budgetary forecasting and reporting purposes.