September 29, 2014

The Legislative Analyst's Office (LAO) has released a summary of LAO findings and Recommendations on the 2014-15 Budget. This can be found online by clicking here. 

 ~David Walrath

Reflects revenue collection data as of September 25, 2014, at 2 p.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.

As of the end of August, 2014-15 year-to-date collections of personal income taxes (PIT)-the state General Fund's dominant revenue source-were running $240 million ahead of the administration's projections, and corporation tax (CT) collections were running $257 million ahead of the administration's projections. 

Based on state tax agency reports as of today, the positive collection trends for the state's income taxes are continuing during the current month of September. For the month of September, PIT and CT collections combined are on track to be a few hundred million dollars above the administration's monthly projections. 

More details follow about trends in these taxes and other state revenues.

In general, this note discusses 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.)

Personal Income Tax

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 To Date. PIT withholding has continued to flow into state coffers at a healthy pace. Through today, PIT withholding for September is running 9.3 percent above collections from the same month last year. In addition, the Franchise Tax Board's PIT collections this month-largely September estimated payments-appear to be running at or slightly above administration projections. These estimated payments are related largely to tax liabilities resulting from non-wage income, including capital gains, of higher-income taxpayers. Assuming the rest of this month is like the comparable period last September, net PIT collections in September 2014 should end up just short of $6 billion-over $200 million above the administration's monthly projection. If this occurred, General Fund PIT collections would end this month somewhere around $450 million ahead of administration projections for the 2014-15 fiscal year to date.

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 this month to be over $250 million less than the administration built into its September 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 current stock market prices that continue to be 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.

Corporation Tax

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 To Date. This month, CT refunds have gone out at about the pace projected by the administration. Actual collections, however, are above administration projections for the month. Assuming the rest of this month is like the comparable period last September, net CT collections in September 2014 should end up over $1 billion-perhaps over $100 million above the administration's monthly projection. If this occurred, CT collections would end this month somewhere around $350 million ahead of administration projections for the 2014-15 fiscal year to date. It is important to note, however, that large refunds-common with corporate income taxes-could alter this positive trend at any time either this month or in a future month.

Other Revenue Issues

Sales Tax Running Behind Administration Projections. Net agency cash totals for the state's SUT were running $529 million behind the administration's projections, as of the end of August. Most of this lag, however, results 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 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. Information on September SUT collections will be available in early October.

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 at all for that particular purpose.

LAO Contacts: Jason Sisney, Justin Garosi (PIT), Brian Weatherford (CT), Seth Kerstein (SUT), and Ryan Miller (unclaimed property).