|Budget Issue:||January income tax revenues $5 billion above administration's projection (Updated)|
|Finding or Recommendation:||Provides update concerning January 2013 income tax collections.|
Updated--February 6, 2013.
As discussed by the Legislative Analyst at recent Assembly and Senate budget hearings, January 2013 PIT collections were far ahead of the administration's projections for the month. This note discusses January 2013 PIT collections, as well as corporation tax (CT) collections, as tallied in the first official report on the month's receipts from the Franchise Tax Board (FTB).
For January, General Fund PIT and CT revenues (including Education Protection Account PIT revenues) were a combined $5.004 billion above the administration's projection for the month. By custom, the Department of Finance (DOF) essentially "trues up" prior months' collections in its January 10 (Governor's Budget) forecast. Including minor revisions for prior months, the fiscal year-to-date total for General Fund PIT and CT revenues (including Education Protection Account PIT revenues) is now $5.013 billion above DOF's January 10 projections.
As discussed below and at recent legislative hearings, the influx of additional tax revenue in January may not improve the state's financial bottom line.
PIT Collections Finish January About $5 Billion Above Projections. According to the FTB report described above, the state collected a net amount of $12.784 billion from all PIT sources for the General Fund and the Mental Health Services Fund (MHSF). This exceeds DOF's projection for the entire month--as released in the January 10 2013-14 Governor's Budget--by $5.023 billion. After the monthly transfer to the MHSF, total General Fund PIT revenues were $12.559 billion, or $4.952 billion above the administration's January 10 projection for the month.
Total PIT revenues consist of several components:
What Is Happening? As we discussed in our Overview of the Governor's Budget (see pages 14-15), various unusual economic and tax policy events of recent months make it difficult to project monthly PIT collections now. Following press discussion of this month's record PIT collections, the Legislative Analyst discussed the possible reasons for these trends in the January 24 meeting of the Senate Budget and Fiscal Review Committee (accessible via The California Channel website beginning at 00:27:20) and the January 31 meeting of the Assembly Budget Committee (also accessible via The California Channel website beginning at 00:45:50).
There appear to be three possible reasons for the January PIT collection trends:
It will take time to develop solid theories as to why January PIT payments were so favorable. By May, both we and the administration should have additional data--including data from April 2013 PIT collections--to begin making better judgments. At the same time, it likely will take forecasters more than a year to fully understand all of the recent unusual tax activity.
Higher Revenues Will Not Necessarily Improve the State's Financial Bottom Line. As the Legislative Analyst discussed with the Senate and Assembly Budget Committees, the improved revenue situation in January will not necessarily help the state's financial bottom line. That is because, under certain scenarios, the January revenue boost could result in an increase in the state's Proposition 98 school funding minimum guarantee in 2012-13 by a like amount. This is because the state is in a "Test 1" year for Proposition 98, and higher 2012-13 revenues currently produce increased maintenance factor payments of a like amount. At the same time, possible lower-than-expected growth in 2013-14 revenues also could result in a somewhat lower Proposition 98 minimum guarantee for schools and community colleges in the fiscal year beginning July 1. We emphasize that it is far too soon to know what will happen in the coming months concerning these revenue trends. By May, better information about revenue trends--and the years to which such revenues will be accrued--should be available to ascertain possible effects on Proposition 98, the rest of the state budget, and the state's bottom line.
CT Collections Finish January $53 Million Above Projections. For January, net CT collections were $78 million, or $53 million above DOF's modest projection for the month. January is not a major CT collection month. In January 2012, one year ago, net CT collections were $107 million.
January 10 Budget Projection "Trues Up" Prior Months' Totals. By custom, the administration's January 10 budget projection essentially "trues up" previous months' income tax collections to their actual amounts. Thus, if January 2013 ends with PIT about $5 billion above the DOF's projection for the month, 2012-13 PIT collections for the fiscal year to date also will be about $5 billion above the administration's projections.
Agency Cash Totals Used, Not "Controller's Cash." The figures above are based on the first official tally of January PIT and CT collections by FTB. Generally speaking, these tallies--combined with data from sales tax and other revenue collections--will be published in the DOF Finance Bulletin, the authoritative monthly report of agency cash, in mid-February. ("Controller's cash" data, reported by the State Controller's Office, is not used for budgetary revenue tracking and forecasting.)