|Budget Issue:||Big Three state taxes below projections in February|
|Finding or Recommendation:||Provides report on February 2011 personal income, corporation, and sales and use tax collections based on preliminary agency cash reports.|
“Big Three” General Fund Revenues. Preliminary reports for February 2011 collections of California’s “Big Three” revenue sources—the personal income tax (PIT), the corporation tax (CT), and the sales and use tax (SUT)—show that agency cash receipts were several hundred million dollars below projections for the month.
Ignoring several adjustments in prior months’ SUT receipts (which the Board of Equalization [BOE] has included in the same report with February receipts), February 2011 collections were about $300 million below the administration’s projections for the month. For the 2010-11 fiscal year to date, Big Three General Fund revenues now appear to be running about $970 million (1.9 percent) above DOF’s projections. While PIT withholding receipts are running very strong, PIT refunds in February were far above DOF’s projections, and we remain concerned that this trend in refunds may continue in the coming weeks. If PIT refunds or "net final payments" (final PIT payments this spring less refunds) continue to run worse than projections, this will make it more difficult for the General Fund to hit the administration’s General Fund revenue projection for 2010-11. Corporate tax collections also remain a concern.
Personal Income Taxes. The preliminary Franchise Tax Board (FTB) monthly collections report indicates that net PIT receipts totaled $1.59 billion in February—$16 million (1.0 percent) above DOF’s monthly projection. For the 2010-11 fiscal year to date, net PIT receipts total $31.4 billion—$1.3 billion (4.3 percent) above DOF’s projections for the fiscal year to date. The preliminary PIT report for February contains both promising numbers for the state’s current economic picture and some foreboding numbers for 2010-11 state revenues.
On the positive side, PIT withholding numbers were once again very strong, running $420 million (15 percent) above DOF’s projection for the month. Under current law, PIT rates currently are lower than they were in 2010 due to the expiration of the February 2009 temporary PIT increases. All else being equal, these lower rates would tend to depress PIT withholding by about 5 percent. Nevertheless, in February 2011, the state’s PIT withholding receipts were about 12 percent above receipts from the same month in 2010. These PIT withholding figures suggest that job and salary growth in the state’s economy may be somewhat better than recent employment reports have indicated.
On the flip side, for state revenue collections, PIT refunds were $445 million (30 percent) higher than in the same month in 2010 and were also 30 percent above DOF’s monthly forecast. (February is typically the third-highest month of the year—behind March and April—for PIT refunds.) In November 2009, the state increased PIT withholding rates by 10 percent, and the higher level of refunds surely is a function of taxpayers’ being “over-withheld” on their PIT liabilities during tax year 2010—the first full tax year that accelerated withholding was in place. For these reasons, both our office and DOF expect PIT refunds to be much higher than normal in the coming three months, when most PIT filers receive their refunds. In our recent reports to the Legislature on revenue collection trends, we have raised concern that PIT refunds in the coming months may be even higher than DOF’s forecast. The PIT refunds and the trend in net final payments, therefore, will be important to watch in the coming weeks. If PIT refunds or net final payments continue to trend worse than DOF’s monthly projections, it may be difficult for the state to hit the administration’s PIT revenue projection for 2010-11.
Corporation Taxes. February is a minor month for CT collections. The preliminary FTB report indicates that net CT receipts totaled $128 million in February—$142 million (53 percent) below DOF’s monthly projection. For the 2010-11 fiscal year to date, net CT receipts total $4.1 billion—$187 million (4.3 percent) below DOF’s projections for the fiscal year to date.
Sales and Use Taxes. In a prior comment, we discussed BOE’s determination that prior months’ 2010-11 SUT receipts for the General Fund needed to be adjusted downward due to an incorrect allocation in some months related to last year’s “fuel tax swap.” The preliminary SUT report from BOE incorporates this -$308.4 million adjustment, along with another allocation adjustment of -$81.6 million, alongside February SUT receipts. Ignoring these two adjustments, preliminary net SUT receipts in February would have been $2.18 billion, or $152 million (6.5 percent) below DOF’s monthly estimates. This offsets somewhat the incredibly strong level of SUT receipts described in BOE’s preliminary tally for January 2011, perhaps due in part to timing issues concerning SUT collections that we noted in last month’s revenue report.
For the fiscal year to date, net SUT collections now are reported to be $17.8 billion—about $131 million (0.7 percent) below DOF’s year-to-date projections. The recent changes concerning BOE’s reporting of the fuel tax swap—combined with the weaker-than-projected SUT performance in February—have evaporated the positive year-to-date sales tax trends that we reported one month ago.
Methodology.The FTB and BOE reports upon which this update is based are "agency cash" reports. 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.