|Budget Issue:||California "Big Three" tax revenues $465 million above projections for September|
|Finding or Recommendation:||This note discusses September 2014 California state revenue collection trends.|
Reflects revenue collection data as of October 16, 2014, at 10 a.m., Pacific time.
September is one of California's significant income tax collection months each year. Some taxpayers are required to make third-quarter "estimated payments" by September 15. Below, we list September 2014 tax collection totals based on reports from the state's tax agencies.
Totals As of End of September. California's "Big Three" taxes—the personal income tax (PIT), the sales and use tax (sales tax, or SUT), and the corporate income tax (also known as the corporation tax, or CT)—currently generate over 96 percent of the annual revenues of the General Fund, the state government's main operating account. (The PIT alone generates about two-thirds of General Fund revenues.) For the 2014-15 fiscal year to date, as of the end of September, the Big Three taxes combined are running $446 million ahead of the administration's projections. This includes a one-time $343 million negative adjustment for sales taxes in August (described below) that is expected to be booked to prior years' totals, thereby not directly affecting 2014-15 budgetary revenues. If one were to adjust the year-to-date totals to remove this one-time sales tax adjustment, the Big Three taxes can be viewed as running $789 million ahead of administration projections for the 2014-15 fiscal year to date: with the PIT running $597 million ahead of projections, the CT running $402 million ahead of projections, and the SUT running $210 million below projections.
Our office will update its 2014-15 revenue projections in our annual Fiscal Outlook report, scheduled for release on or about November 19. The administration generally updates its revenue projections in early January, with release of the Governor's annual budget proposal.
In general, the contents of this note below discuss collection trends relative to the administration’s monthly revenue projections. (The administration’s revenue projections were included in the state’s 2014-15 spending plan, as passed in June.) The information below generally is the same as that included in our September 25th and October 2nd revenue update notes, except for updated information concerning September tax collections.
Background. PIT makes up about two-thirds of California’s General Fund revenues. Revenue collections are volatile for a number of reasons, including the state’s taxation of net capital gains. Such gains are received predominantly by the state’s higher-income taxpayers, who pay higher tax rates. Largely as a result of this, in 2012, the 1 percent of California PIT filers with the most income received 25 percent of adjusted gross income, but paid just over 50 percent of all personal income taxes received by the state. (For more information on the tax and income distribution, see the Franchise Tax Board’s May revenue exhibits: Exhibit A-10.) In part because PIT fluctuates significantly due to changes in asset prices and decisions by high-income taxpayers about when to realize income, it is very difficult to forecast annual or monthly PIT receipts with precision. In each fiscal year, PIT revenues easily can end up a few billion dollars above or below projections in that year’s budget act.
2014-15 Revenue Collections Through August. As of the end of August, agency cash General Fund PIT collections were $240 million (3.1 percent) ahead of administration projections for the 2014-15 fiscal year to date. The first two months of 2014-15 (July and August) are both relatively minor PIT collection months, with the bulk of revenues coming from withholding—largely generated by taxes withheld from workers' paychecks, as well as taxes withheld on certain bonuses and options. The administration projected that withholding in July and August 2014 would exceed July and August 2013 levels by 4.7 percent. Withholding in July and August actually came in considerably stronger: 8.1 percent over 2013 levels.
September 2014 Collections. PIT withholding has continued to flow into state coffers at a healthy pace. Based on preliminary reports, PIT withholding was 14.1 percent higher in September 2014 than in September 2013, with part of this year-over-year gain attributable to an extra collection day this year. September 2014 withholding totals were $302 million above administration projections for the month. In addition, the Franchise Tax Board’s PIT collections in September—largely estimated payments—collectively were $92 million above the administration's projections. (Estimated payments are related largely to tax liabilities resulting from non-wage income, including capital gains, of higher-income taxpayers.) PIT refunds were $30 million above (that is, worse than) administration's estimates in September.
Differences in Monthly Forecasts. In May, our office projected that annual PIT revenues accrued to the 2014-15 fiscal year would be over $2 billion more than projected by the administration. Yet—indicative of the challenges of monthly tax forecasting—our office expected estimated payment collections in September to be over $250 million less than the administration built into its monthly projections. Viewed from this perspective, September’s PIT results may be even more positive than suggested in the above paragraph. (This is consistent with stock market prices that generally have been above those assumed in our office’s May forecast.) Our office's May 2014 forecast anticipated that PIT collections in April 2015—and perhaps December 2014 and January 2015—will be above administration projections, as taxpayers continue to make payments related to the 2014 calendar year. Our office will update these revenue forecasts when we release the 20th annual edition of California’s Fiscal Outlook on or about November 19.
2014-15 Revenue Collections Through August. As of the end of August, agency cash CT collections were $257 million ahead of the administration’s projections for the 2014-15 fiscal year to date. This is due to lower levels of CT refunds than the administration assumed during this time period. (In general, lower tax agency cash refunds in this fiscal year will boost revenues booked to last fiscal year in the state budget under the state’s complicated revenue accrual process.)
September 2014 Collections. In September, CT refunds went out at about the pace projected by the administration. Actual collections by the Franchise Tax Board, however, were nearly $150 million above administration projections for the month, based on preliminary reports.
Sales Tax Running Behind Administration Projections. Net agency cash totals for the state’s SUT were running over $500 million behind the administration’s projections, as of the end of August. Most of this lag, however, resulted from a $343 million allocation of state SUT to local governments to correct for prior year accounting issues. We understand this $343 million hit to state SUT revenues will essentially be accrued in the state’s budgeting system to prior years (specifically, as a reduction in the state's "entering fund balance"), thereby not directly affecting the level of 2014-15 revenues shown in future annual budget documents. As noted above, September SUT collections were $37 million below administration's projections, based on preliminary tax agency data. For the fiscal year to date, incorporating prior month adjustments, SUT is now running $553 million below administration projections for the 2014-15 fiscal year to date, or $210 million below projections if the one-time accounting adjustment described above is excluded.
General Fund Unclaimed Property Revenues Behind Projections in July. The state’s General Fund receives revenues from unclaimed properties forwarded to the State Controller’s Office—after paying amounts to people and organizations that claim such properties from the state. In 2014-15, the state budget projects that the General Fund will receive $446 million of this revenue. In July, the Department of Finance—in its monthly Finance Bulletin—noted that “other” General Fund revenues (a collection of various small revenue sources) ended that month $130 million below the administration’s forecast “due to higher than expected unclaimed property payments.” This suggests that General Fund unclaimed property revenues may be lower than previously assumed.
Settlements and Judgments. Each year, the state General Fund receives some payments from court and administrative judgments. In 2012-13, for example, $23 million of such payments were received by the General Fund. The 2014-15 budget assumes the General Fund receives $323 million of such payments. On September 2, the California Public Utilities Commission issued decisions by administrative law judges that sought to impose a $1.4 billion penalty on Pacific Gas and Electric Company, including a $950 million payment to the state General Fund. If this payment is received by the state in 2014-15, it may result in an increase in General Fund settlement and judgment revenues, relative to those assumed in the 2014-15 budget act. If no such payment is received by the General Fund in 2014-15, it could result in these revenues being less than assumed in the budget act by hundreds of millions of dollars.
Methodology Used by LAO in Tracking Revenues. Real-time state tax agency collection reports (“agency cash”) generally are used to track trends in budgetary revenue collections (that is, trends relative to revenues assumed in the state’s annual budget act). We do not use monthly “Controller’s cash” reports for that particular purpose.