August 11 , 2009

State Controller Releases Summary

By David Walrath

The State Controller is looking for silver linings in cloudy skies. Even though state tax revenues are continuing to decline, the rate of decline is slowing. This can be interpreted as good news because it is not worse news. The following are the comments made by the Controller.  

What The Numbers Tell Us

Feeling for the Bottom

While the State’s General Fund Revenue came in below last July, there are signs that California’s economy is feeling for the bottom. When adjusting for Registered Warrants issued on personal income and corporate tax refunds, General Fund Revenue was 8% below July 2008. However, the pace of deterioration has slowed considerably relative to the 39.4%, 39%, and 17.7% deterioration in March, April, and May, respectively.

This slowing decline can be attributed to several factors — both economic and policy changes. First, the Governor signed a bill in October that imposes a 20% understatement penalty on corporate tax. Companies were given the option to avoid the penalty by filing an amended return and paying their actual tax liability by May 31, 2009. As a result, corporate taxes saw sharp increases as firms took action to avoid the penalty.

Second, the sales tax rate was increased on April 1 from 7.25% to 8.25%. This has helped to bolster the sales tax revenues collected by the State, which were up 20.8% from last July. Another policy change that has had a positive impact on California’s sales tax collections is the Federal Government’s “Cash for Clunkers” program. This program, which was allocated $1 billion, provides for up to $4,500 in rebates for trading in used cars to purchase a new car. This program has been successful in boosting demand for new automobiles, and thus, generating additional tax revenues for California. Although this positive indicator is driven by economic incentives created by policy changes in Washington D.C. more than a genuine rebound in consumer activity, any encouraging signs in the economy were virtually nonexistent six months ago.

Finally, on the economic side, the pace of job declines has also slowed significantly. Although California’s unemployment rate increased in June, it did so at a slower pace. There are signs that many sectors are nearing a bottom, including construction, which should begin to stabilize as residential building permits have leveled off in recent months. Also, as savings rates have increased — reaching 5.2% of disposable income in the second quarter of 2009 — people are beginning to develop a cash cushion that will ultimately allow them to feel comfortable spending again.

We are not ready to signal the beginning of the recovery in California yet, but there are many signs that the State is feeling for the bottom and that the end is near.

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