Back to 2014 Issues

2014

Other Budget Issues

Further Detail

This note answers some key questions about California’s April personal income tax (PIT) collections, in order to prepare readers to better understand the collections we will describe in the coming days on our website and via Twitter. Our website tally of April PIT collections is updated once or twice daily this month. Expect our key updates to be announced by Twitter each afternoon beginning tomorrow, April 15.

Why Are April Revenues So Important? April is a key PIT collection month for California, and the PIT makes up about two-thirds of the revenues of the General Fund. The General Fund is the key state government operating account that provides most state funding for schools, community colleges, universities, prisons, courts, health and human services programs, debt service, state employee pay, and public employee pensions, among other public programs. April PIT collections likely will play a big role in determining whether state revenues increase or decrease (compared to prior projections) when the Governor releases his May Revision to the budget next month.

What Are Some Major Parts of April PIT Collections?

Among the reasons that April PIT collections are so interesting is that they include collections and refund activity related both to 2013 and 2014. Specifically, April 2014 PIT totals include:

• 2013 Final Return Payments. For most PIT filers, returns are submitted to the Franchise Tax Board (FTB) for the 2013 tax year by April 15. Some returns include payments, such that April final return payments are projected to total much more than those received in any other month of the 2013-14 fiscal year.
• 2013 Extension Payments. California grants PIT filers an automatic extension to file PIT returns for the prior year through October 15. Nevertheless, PIT filers generally must pay amounts due for 2013 by April 15 to avoid penalties and interest charges. Accordingly, a few billion dollars of extension payments are projected to be received this month.
• 2013 Refunds. Many PIT filers receive tax refunds. The PIT refund season begins in February, peaks in April, and typically concludes in May. Note that PIT refunds are subtracted from PIT collections to produce the net amount of PIT collections each month. In other words, from the state’s budgetary perspective, fewer refunds contribute to more net PIT collections, and more refunds contribute to less net PIT collections. Put another way, when refunds are below projections (as they were in March 2014), this can contribute to net PIT collections being above projections.
• 2014 Withholding. Withholding consists mainly of amounts withheld from employees’ paychecks in each pay period. Accordingly, PIT withholding is received by the state fairly evenly throughout the year. April, in fact, is often a modest PIT withholding month.
• 2014 Estimated Payments. For certain categories of taxable income, there are no withholding requirements. These include business and capital gains income, two volatile categories of income received in large part by high-income taxpayers. Generally, these taxpayers are required to make “quarterly” estimated payments to cover the current calendar year’s tax liability on that income. The first quarterly estimated payments for 2014 are due on April 15. This is one of the first indications of the possible level of capital gains and business income that California PIT filers will report for 2014.

What is the Projected Level of April 2014 PIT Collections?

Big Drop in April PIT Collections Projected. Some are surprised to learn that the most recent projection—released by the Brown Administration in January—anticipates a large decline in PIT collections this month, compared to amounts collected one year ago in April 2013. Specifically, the administration projects that total net PIT collections (gross PIT collections for all state funds less refunds) will equal $11.0 billion this month, down about $2.0 billion (15.5 percent) from the $13.0 billion of net PIT collections recorded in April 2013. One key reason for the anticipated decline is simple: April 2013 collections were unusually high in part due to the one-time effects associated with the beginning of Proposition 30, the temporary tax increase measure approved by voters in November 2012. Proposition 30’s tax rate increases for the top 1 percent of California’s PIT filers generally applied retroactively to the beginning of 2012—over 10 months prior to the election—which means that these higher-income taxpayers did not make estimated payments or have taxes withheld from their paychecks based on the higher Proposition 30 rates during most of the 2012 calendar year. This contributed to final return and extension payments being much higher than usual in April 2013, as some Proposition 30 taxpayers paid more to “settle up” their 2012 tax payments.

During 2013, by contrast, the Proposition 30 tax rates were in effect from the beginning of the calendar year, and high-income taxpayers generally were making estimated payments and withholding payments based on these rates for the entirety of the year. As such, it is reasonable to expect that April 2014 collections—in particular, final return and extension payments—will be somewhat less than those of April 2013.

Following is more detail on the PIT payments and refunds anticipated in the administration’s most recent projections for the month of April 2014, compared to the levels of one year ago in April 2013:

• Final Return Payments Projected to Be $429 Million Lower. The administration’s January 2014 forecast anticipates $3.5 billion of final return payments this month. This total is $429 million (12.8 percent) below the level of final return payments in April 2013.
• “Other” Payments (Including Extensions) Projected to Be $1.85 Billion Lower. The administration’s January 2014 forecast anticipates $4.5 billion of “miscellaneous” payments this month, a collections category that consists principally of extension payments in April. This total is $1.85 billion (29.0 percent) below the level of miscellaneous payments in April 2013.
• Withholding Projected to Be $189 Million Higher. The administration’s January 2014 forecast anticipates $3.5 billion of PIT withholding payments this month. This total is $189 million (5.6 percent) above the level of withholding payments in April 2013.
• Estimated Payments Projected to Be $315 Million Higher. The administration’s January 2014 forecast anticipates $2.3 billion of PIT estimated payments this month. This total is $315 million (15.9 percent) above the level of estimated payments in April 2013.
• Refunds Projected to Be $245 Million Higher. The administration’s January 2014 forecast anticipates $2.9 billion of PIT refunds this month. This total is $245 million (9.1 percent) above the level of refunds in April 2013.

What Are the Key Data to Watch?

Focus Is on FTB Collections and Refunds. Most PIT withholding is paid to the state’s Employment Development Department (EDD), and our daily PIT updates include withholding data. (Total net PIT collections described above, for example, include EDD PIT withholding.) Withholding, however, is received fairly evenly throughout the year and, as such, withholding is rarely what makes April PIT totals interesting. Instead, the key data in April are the two FTB totals we will report each day: FTB PIT collections and FTB PIT refunds.

It is important to note that during the month of April, breakouts of FTB PIT collections by discrete category (final returns, estimated payments, and extension payments) generally are not available. Instead, the “daily totals” received during the month of April lump all of these FTB collection amounts together.

What Is Needed to “Meet Projections” for the Month? Excluding PIT withholding (collected, as noted above, by EDD), the administration essentially forecasts that FTB PIT collections for the entire month of April 2014 will total $10.388 billion, or $1.968 billion (15.9 percent) below the level recorded in April 2013. As noted above, the administration forecasts that FTB PIT refunds for the entire month of April 2014 will total $2.935 billion, or $245 million (9.1 percent) above the level recorded in April 2013. Combined, this means the administration forecasts net FTB PIT collections (FTB PIT collections less FTB PIT refunds) for the entire month of April 2014 of $7.453 billion, or  $2.213 billion (22.9 percent) below net FTB PIT collections recorded in April 2013.

Accordingly, a key metric to watch in the coming days is how April 2014 net FTB PIT collections (FTB PIT collections less FTB PIT refunds) are performing relative to April 2013. If April 2014 net FTB PIT collections run around 23 percent below last April’s levels, there is a good chance that this month will end close to the administration’s projections. Stronger or weaker performance obviously would imply monthly results better or worse than the administration's projections.

"Big Three" Revenues Through End of March About $1.2 Billion Above Projections. Through the end of March 2014, the state's "Big Three" General Fund revenues (PIT, corporate income taxes, and sales taxes) were running about $1.2 billion above administration projections for the 2013-14 fiscal year to date. (These figures are based on preliminary tax agency data that may change as the information is checked and reconciled further.) Thus, even if April revenues run over $1 billion below projections for the current month, the state may remain on track to meet the administration's 2013-14 revenue projections. Conversely, if April revenues exceed projections for the current month, the $1.2 billion figure above could grow.

Is It Easy to Discern Key Trends from the Daily Totals?

Our office has tracked daily revenue totals for many years—long before the web made it easy to disseminate this data widely. Based on this experience, we observe that it is sometimes difficult to discern key revenue trends from the daily data—at least until near the end of the month. One reason this is so is that each April has a somewhat different pattern of collections. In part, this is because electronic filing has increased significantly in recent years, which has accelerated the pace of collections during the month somewhat. Still, a significant portion of returns come in paper format via the U.S. Mail, and these returns can trickle in for days following April 15. The collection trend during the month can be faster or slower depending, in part, on variable U.S. Mail delivery times. Bottom line: we will do our best to gauge how collections are performing relative to last year on a daily basis, but dependable information may not be available until later in the month—April 21 or perhaps later.

Can We Tell the Level of 2013 Capital Gains from April Data?

Capital Gains Data Takes A Long Time to Finalize. The data we receive this month concerning April 2014 tax collections will begin to suggest what level of capital gains were realized by California PIT filers in 2013 (as evidenced by final return and extension payments). The daily totals received during the month will not be broken out by these payment categories, however, and when additional detail is received early next month, we will not have much of the way in specifics about 2013 capital gains despite having some additional information about final return and extension payments received in April. Accordingly, while we begin to ascertain the level of capital gains realized in 2013 this month, specific, reliable data will take many months to develop. In particular, for 2013 capital gains, we do not expect to receive solid data concerning amounts included in tax returns until over one year from now—during the spring of 2015. It takes many months for tax agencies to reliably compile data from the state’s millions of PIT returns. Recently, we have discussed how the lags in receiving this data affect state budgetary planning related to the Governor’s proposed rainy-day fund constitutional requirement. Simply put, the level of capital gains realized by California PIT filers in 2013 will remain quite uncertain until at least the spring of 2015.

On a related note, it is important to realize that the state's increasingly complicated revenue accrual policies mean that a noticeable chunk of April 2014 revenue collections will not be booked to the 2013-14 fiscal year in future budget acts. One reason this is so is that a portion of 2013 capital gains are booked instead to the 2012-13 fiscal year, which ended last June. The long delay in getting solid capital gains data for 2013 means it takes a long time to truly "close the books" on the state's 2012-13 budget—at least until next year sometime.

LAO Contacts: Jason Sisney and other analysts in the LAO's State and Local Finance section.