Legislative Analyst's Office, May 1996
Economic and Revenue Developments
Revenues Up Nearly $1.1 Billion In Current Year
General Fund revenue collections in April from all sources were up $704 million above
the January Governor's Budget projection for the month. Given that collections through
March were up $380 million, cumulative
receipts through April are nearly $1.1 billion above
the budget projection.
Sources of the Gain
Most of the gains both during April and for
first ten months of 1995-96 are from higher-than-expected personal income tax payments.
However, as shown in Figure 1, all three of the
major taxes are running ahead of the January forecast.
Specifically:
- Personal income taxes were
up $380 million in April, and are now $583 million above the estimate in
cumulative terms. The cumulative gain is related to both
stronger-than-predicted final payments on 1995 returns, as
well as consistently higher-than-expected withholding payments.
- Sales and use taxes were up
$250 million in April and are running
$356 million ahead in cumulative terms. Most
of April's $250 million gain is due to the
earlier-than-expected processing of final tax payments on first quarter
1996 taxable sales. These final payments were due on April 30, and the
monthly gain will largely be offset by lower
"spill- over" collections in early May.
Even after accounting for this cash-flow factor, however, the underlying trend
in sales tax receipts is slightly stronger than anticipated in the January
budget forecast.
- Bank and corporation taxes were
up $58 million in April, and are now
$76 million above the year-to-date estimate. These gains suggest that
corporate profits in California are running
slightly ahead of the budget forecast.
Large Withholding Gains Imply Stronger Economy
The most positive revenue development over the past several months has been the
consistently higher-than-expected levels of income tax withholding payments. April's
withholding receipts were 16 percent higher than last
April's, while cumulative 1995-96 payments through April are running 9 percent ahead of last year.
Historically, the performance of withholding has been a good general indicator of the
state of California's economy. For example, withholding fell sharply in the early 1990s,
reflecting the severe nature of the recession that
hit California at that time. Similarly, the
current withholding gains provide encouraging evidence that the underlying trend in wages
is stronger than previously thought. The withholding gains are especially strong in view of
the elimination of the top 10 percent and
11 percent marginal state income tax brackets as
of this January.
Implications For 1995-96 Revenues
If current tax-related trends continue over the near term, most of the current
$1 billion-plus revenue gain would be expected to hold
through the end of 1995-96. In fact, a continuation
into May and June of the recent trend of
higher-than-projected withholding and quarterly
prepayments would lead to further increases in personal and corporate tax receipts.
Offsetting these pluses, however, are two negative
factors. First, personal income tax refunds on
1995 final returns are running higher than
expected, and this trend appears to be continuing in
May. Second, as indicated above, collections data for early May suggest that much of the
$250 million increase in sales taxes during April will
be offset this month.
Contact -- Brad Williams -- (916) 324-4942.
Public Safety Has Been
Highest Local Funding Priority
The recession of the early 1990s, combined with the shift of more than $2.5 billion annually in property taxes to schools, has reduced the available revenues to California's 58 counties. At the same time, the recession resulted in increased demand for many social services. As a result, many counties have been forced to reduce the level of services they provide.
Recognizing the difficult financial condition of California's counties and the fact that public safety services could be compromised by the reduction in available resources, the Legislature placed Proposition 172 on the November 1993 ballot. This measure was in turn approved by the voters. Proposition 172 created a permanent, one-half cent sales tax for public safety purposes (generally the sheriff, district attorney, and probation departments). The Public Safety Sales Tax generates more than $1.5 billion for local public safety purposes each year, with 95 percent of this revenue going to counties.
How Has Public Safety Funding Fared?
To see how public safety funding has fared in recent years, we surveyed seven counties (representing 50 percent of the state's population). We found that between 1992-93 and 1995-96 spending for public safety departments receiving Proposition 172 funding increased by an average of 7.9 percent. During this same period, counties' three largest general purposes revenue sources -- the property tax, the sales tax (including Proposition 172 funds), and the vehicle license fee -- increased by a combined total of just 3.2 percent. For comparison purposes inflation during this period -- as measured by the California Consumer Price Index -- increased by 5.9 percent (see Figure 2).
Within public safety departments, sheriffs' department budgets grew faster than all others. Spending on sheriffs' departments increased by 8.6 percent, while spending for other public safety departments covered by Proposition 172 increased by 5.2 percent.
Funding Has Exceeded Minimum Requirements
Despite the slow growth in revenues resulting from the recession and the property tax shifts, counties have maintained public safety spending in excess of the minimum requirements of the maintenance-of-effort provision of the Proposition 172 implementing legislation, Chapter 886, Statutes of 1994 (AB 2788, W. Brown). This statute requires that counties increase spending for public safety departments above the 1992-93 funding level in accordance with growth in Public Safety Sales Tax revenues. Among a sample of 10 counties, spending for public safety exceeded the minimum requirements of the law by an average of 9.3 percent (see Figure 3).
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