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Last Updated: 3/11/2014
Budget Issue: February 2014 California income taxes far above projections
Program: Revenues
Finding or Recommendation: This note provides an update on California's February 2014 collections of major state taxes. (Updated March 11, 2014.)
Further Detail

This note provides updated information concerning California’s February 2014 collections of major state tax revenues. Information provided in this note is tabulated using the “agency cash” method: the method that is based on real-time collections by the state's tax agencies. Agency cash is the measurement method used to track and forecast revenues available for the annual state budget process and differs from the “Controller’s cash” method based on the timing of revenue receipts.

Key Points: February Revenues

(Updated: March 11, 2014)

  • Personal income taxes were $716 million above administration projections for the month of February. (For the 2013-14 fiscal year to date, personal income taxes are $667 million [1.7 percent] above administration projections.)
  • Corporation taxes were $86 million above administration projections for the month of February. (For the 2013-14 fiscal year to date, corporation taxes are $284 million [11.1 percent] above administration projections.)
  • Sales and use taxes were $23 million below administration projections for the month of February. (For the 2013-14 fiscal year to date, sales and use taxes are $127 million [0.8 percent] below administration projections.)
  • Combined, the "Big Three" General Fund taxes—listed above—were $779 million above administration projections for the month of February. (For the 2013-14 fiscal year to date, the Big Three are $824 million [1.5 percent] above administration projections.)

Personal Income Taxes

The state collects PIT withholding revenues from amounts remitted by employers connected with workers' salaries, as well as certain bonuses, options, and other income. PIT estimated payments are made quarterly by high-income taxpayers with capital gains and business income. (February is not a major month for estimated payments.) Deducted from PIT totals each month are refund claims filed by taxpayers with the Franchise Tax Board. Refund activity is concentrated each year in February, March, and April.

Very Strong Month for PIT Withholding. Based on preliminary tax agency data, February 2014 withholding collections of $4.03 billion were 18 percent higher than those collected one year before in February 2013. In fact, February 2014 withholding amounts were much higher than in any other February in at least 15 years. (The next highest February by this measure was the $3.48 billion collected in February 2012.) The preliminary reports indicate that withholding was $468 million (13 percent) above the administration's projection for the month.

  • Why Was Withholding So High? We do not know the answer to this question. Theories include:
    • Bonus and Option Income. Unexpectedly high bonus and option income, which tends to be paid to workers of certain high-income industries around the beginning of each year, could be responsible in part for the strong February withholding results. (December and January withholding were above prior-year levels by 10 percent and 8 percent, respectively, and this also could have been caused in part by bonus and option income.) Along with capital gains (for which taxes are generally not subject to withholding), bonus and option income is among the more volatile elements of the state's personal income tax.
    • Employment and Wages. A faster recovery for employment and/or wages than projected by either our office or the administration could be responsible in part for the February withholding totals.
    • Prior-Year Tax Changes. With regard to the strong year-over-year growth of withholding in February, this may be explained in part by the shift of taxpayer income to late 2012—due to the federal tax increases in early 2013—being greater than expected or by delayed implementation in early 2013 of higher withholding rates by taxpayers affected by Proposition 30. In any event, given that both the administration's forecasts and our own assumed large shifts of taxpayer income from 2013 to 2012 due to the federal tax changes, the strong withholding growth of recent months—especially February—is surprising to us.
  • Will This Continue? We do not expect withholding to continue to outpace prior-year totals by 10 or 20 percentage points through the rest of 2014. For March through June 2014, the administration projects that withholding will outpace prior-year totals by an average of 6 percent. We think this is a reasonable forecast for withholding.

PIT Refunds Well Below Administration Projections. February is the first whole month in the annual peak season for PIT refunds. Preliminary FTB data indicates that refunds totaled $2.38 billion. This is $276 million (10 percent) lower than the administration's projection for the month. (This contributes to overall PIT revenues being higher than expected for the month, due to the lower level of refunds.)

Bottom Line: February PIT $716 Million Above Administration's Projections. In total, the preliminary tax agency data indicates that General Fund PIT collections for February 2014 were $2.05 billion, or $716 million (54 percent) above the administration's projections. For the 2013-14 fiscal year to date, this means that PIT collections are beating the administration's January budget projections by $667 million (1.7 percent). (The administration's January budget projections "true up" estimates with actual collections for the first few months of the fiscal year.)

Corporation Taxes

February Collections $86 Million Over Administration Projections. February is a minor month for corporation tax (CT) collections. Preliminary FTB data indicates that February 2014 CT receipts were $224 million and CT refunds were $102 million, for a net amount of CT revenues totaling $123 million. This amount is $86 million over the administration's forecast for the month. Receipts were in line with the administration's projections, while refunds were 46 percent below projections. Under the state's budgetary revenue accrual policies, to the extent that fiscal year refunds are less than projections in 2013-14, this will tend to increase CT revenues booked to the prior fiscal year, 2012-13.

For the 2013-14 fiscal year to date, net agency cash CT collections are $284 million (11 percent) above the administration's projections.

Sales and Use Taxes

February Collections $23 Million Below Administration Projections. Preliminary data from the State Board of Equalization indicates that General Fund sales and use tax (SUT) collections in February totaled $1.70 billion, or $23 million below administration projections. For the 2013-14 fiscal year to date, General Fund SUT collections are $127 million (0.8 percent) below administration projections.

LAO Revenue Outlook

As we discussed last month, our office's November 2013 revenue projections were $1.9 billion higher than the administration's updated January 2014 projections for the General Fund's "Big Three" personal income, corporate income, and sales taxes for the 2013-14 fiscal year. A $1.9 billion difference is not a large one in the context of the state's approximately $100 billion annual budget, especially given the volatility and unpredictability of PIT taxes related to capital gains, business, option, and bonus income, as well as corporate taxes.

February's strong PIT withholding totals are good news for state finances. While we think the administration's PIT withholding projections for the rest of 2013-14 are reasonable, it is possible that withholding will continue to outperform projections to some extent. If, on the other hand, PIT withholding for the rest of 2013-14 comes in close to the administration's projections, PIT estimated payments in April and June 2014—generated from taxpayers' expected 2014 capital gains, business, and other income—likely will need to be higher than the administration now projects for those months in order for our office's higher 2013-14 forecast to prove closer to being correct. Since November 2013, stock prices have generally been above the level our office assumed in the November revenue forecast. Our office's November forecast assumed that the S&P 500 stock index would remain near its October 25 level of 1760 through March before resuming slow growth thereafter.

Both our office and the administration will release new state revenue projections in May.

LAO analysis prepared by: Jason Sisney, with contributions from Justin Garosi, Seth Kerstein, and Brian Weatherford.

This note was updated on March 11 to reflect (1) updated information concerning personal income and corporation tax receipts for the month of February and (2) preliminary information concerning sales and use tax receipts for the month of February. The LAO's revenue outlook was unchanged from the prior version of this note.