|Budget Issue:||Preliminary April personal income tax collections of $13.02 billion (all funds)|
|Finding or Recommendation:||This page provided updates during April 2013 concerning California personal income tax collections.|
Last updated: Wednesday, May 1, 2 p.m. (Pacific time). This was the final scheduled daily update. A post discussing the preliminary monthly tally from the Franchise Tax Board was released on May 3 here.
Background. Personal income taxes (PIT)—collected by the Franchise Tax Board (FTB) and the Employment Development Department (EDD)—are California state government's largest revenue source. For the month of January 2013, PIT collections exceeded the administration's most recent projections for that month (released in early January) by nearly $5 billion. April generally is the largest PIT collection month for the year, and the administration projected in early January that collections in April 2013 alone would total $13.3 billion (all funds), net of refunds. Yet, because of the January revenue influx, the state really only needed to collect around $8.5 billion of PIT in April to stay on track (that is, even) with the administration's PIT revenue estimates for the 2012-13 fiscal year to date. Bolstered by two huge PIT collection days just after the April 15 PIT filing deadline, the state exceeded this $8.5 billion target for the month on April 17.
Preliminary PIT Tally as of End of April: About $4.5 Billion Over Year-to-Date Projections. The preliminary daily reports from FTB and EDD indicated that PIT collections during the month of April, net of refunds, totaled $13.018 billion (all funds). Adjustments and reconciliations may change these figures somewhat in the coming days, and final PIT tallies in the coming days also will make statutorily required allocations of a small portion of PIT funds to the Mental Health Services Fund. General Fund and Education Protection Account PIT collections for April are expected to total around $12.8 billion, or around 98 percent of the administration's projection for the month for those funds alone.
As of now, our best estimate is that the state will end April with General Fund and Education Protection Account PIT collections for the fiscal year to date, as of that time, of approximately $55.6 billion: somewhere around $4.5 billion ahead of the administration’s estimates.
Effects on State's Financial Bottom Line May Be Limited. As we have discussed since January, these additional revenues raise a number of challenging questions for the updated budgetary forecasts to be released in mid-May, and the corresponding improvement to the state's financial bottom line may be more limited than suggested by the $4.5 billion figure listed above. This is because a large portion of the additional revenues may be required to be allocated to schools and community colleges. These issues are discussed in more detail near the conclusion of this post.
What Happens Next? Both our staff and the staff of the Department of Finance currently are working on updated economic and revenue forecasts to be released in mid-May in connection with the Governor's May Revision of his 2013-14 state budget proposal. While we now have a good sense of PIT revenue collected during 2012-13 to date, there are still important bits of additional information to be received in the coming days, some of which will influence the May forecasts.
In the coming days, for example, our staffs will review updated preliminary tallies from the tax agencies (known as agency cash) concerning other revenue sources, including the sales tax. We also await preliminary tallies of April PIT payments by category: including final and extension payments related to 2012 taxes and the first round of estimated tax payments on 2013 income (mainly by higher-income filers reporting capital gains and those reporting business income). These preliminary tallies will be crucial as we consider the important question of how much capital gains and other income was "accelerated" from 2013 (and later years) into 2012 to benefit from lower federal tax rates then in effect. Our forecasts also will need to make projections concerning June revenue collections (a significant payment month both for PIT and corporation taxes), as well as accruals of revenue to prior fiscal years under the state's complicated accrual policies. Our office's revenue forecasts aim to give our best estimate at the time of where revenues are headed, even as economic and income factors influencing the budget are always changing.
Big Stock Market Gains May Affect Forecasts. Yesterday, the S&P 500 stock index closed at another all-time record high, and the Nasdaq closed at its highest level in over 12 years. Over 40 percent of California's PIT revenues currently are collected from the top 1 percent of the state's PIT filers, and these are taxpayers who receive a significant portion of their income from capital gains. As such, while the future direction of stock prices is always an unknown, any California revenue forecast has to include an assumption—either explicit or implicit—concerning the direction of the stock market.
Stock prices now are considerably above levels assumed in recent state budgetary forecasts. Our office's November 2012 forecast, for example, assumed that the S&P 500 stock index currently would be about 1460. On April 30, the S&P 500 closed at 1598—over 9 percent higher than our prior assumption. The upcoming state budget forecasts will need to consider the net effect of two opposing uncertainties: (1) the potential for greater taxable income in 2013 due to higher-than-expected stock prices and (2) the likelihood that more capital gains and other sources of income were accelerated from the 2013 tax year into 2012. To the extent that higher revenue projections result from stock market gains, these revenues may need to be considered with caution, given the possibility that current stock market levels will not be sustained in the coming months. Changing stock market levels can cause 2013-14 revenues to end the next fiscal year billions of dollars higher or lower than indicated in next month's forecasts.
As discussed below, the key target for PIT collections for the entirety of April was $8.5 billion: the amount needed to stay on track (that is, even) with the administration's revenue estimates for the 2012-13 fiscal year. That target was surpassed, meaning that the state currently is on track to finish 2012-13 a few billion dollars ahead of the administration's revenue estimates.
January 2013 Collections Far Exceeded Projections. The most recent projection of the state’s revenues was released by the administration in early January 2013 as part of the 2013-14 Governor’s Budget proposal. In January 2013, the state’s PIT collections far exceeded these projections. As we discussed at that time, this suggests that some PIT payments were accelerated compared with projections, for the following reasons:
In addition to these payment accelerations, 2012 taxable income, including taxable capital gains and/or income related to the initial public offering of stock by Facebook, Inc., simply may have been higher than indicated in the projections.
PIT Revenues Did Not Hit the Administration's $13.3 Billion Estimate for April Alone. The administration's forecast projected that the state would collect $13.3 billion of PIT (all funds), net of refunds, in the month of April 2013 alone. Given the possibility that some January payments were payments projected to be received this month, it has seemed very unlikely for some time that April 2013 PIT projections would reach this $13.3 billion total for this month alone. Given that hitting the $13.3 billion target was unlikely, we have focused on a different target for this month, as described below.
To Stay Even With Administration's Fiscal Year Projections, April PIT Collections Needed to Reach $8.5 Billion. As of the end of March, fiscal-year-to-date PIT collections were running around $4.7 billion above the administration's most recent projections. For the month of April alone, as noted above, the administration's forecast assumed the state would collect $13.3 billion of PIT, net of refunds. Mainly because of the strong January receipts, however, the state did not need to collect anywhere close to this $13.3 billion in order to remain on track (that is, even) with the administration's year-to-date revenue estimates. To remain on track with the administration's 2012-13 fiscal year revenue estimates, April PIT collections, net of refunds, needed to total about $8.5 billion (all funds). As discussed above, this $8.5 billion target was surpassed in mid-April
Potentially Higher 2012-13 Revenues and Proposition 98 Funding Requirements. The performance of PIT revenues for the fiscal year to date suggests that 2012-13 revenues may end a few billion dollars above recent projections. Under the state’s complicated revenue accrual policies, 2011-12 revenues also may end up higher due to the recent influx of PIT payments.
As we have discussed previously, much or all of any such revenue gain in 2012-13 could be required to be allocated to schools and community colleges under Proposition 98, which means that this fiscal year's strong revenue performance may have little, if any, positive effect for the state's financial bottom line.
It is important to note that June (the last month of the current fiscal year) is also a key month for PIT collections. A major estimated tax payment is due on Monday, June 17 for some PIT filers, particularly those who receive significant capital gains and business income. The administration’s most recent forecast projects that June 2013 PIT collections will be $1.3 billion (18 percent) higher than those of June 2012, including a $955 million (24 percent) increase in estimated payments and a $251 million (8 percent) increase in withholding. Due to (1) the higher marginal tax rates now in effect for upper-income PIT filers under Proposition 30 and (2) the strong performance in recent months of both stock and housing prices, the higher estimates for June estimated taxes are plausible, but there remains a chance that June revenue performance could fall somewhat short. This month's updated revenue forecasts from the administration and our office will have to make estimates concerning June revenue collections. (The Legislature must send a 2013-14 budget bill to the Governor by June 15, several days before the results of the June estimated payments are known.)
Forecasting 2013-14 Revenues. Both our office and the administration will release updated state revenue forecasts in mid-May. Assuming that 2012-13 General Fund revenues (including Education Protection Account revenues) continue to run ahead of prior projections, both of our forecasts will have to make judgments—based on limited data—about how much of the added 2012-13 revenue is related to taxable income accelerated from 2013 (and later years) back to 2012 to benefit from lower federal tax rates then in effect. As we discussed in January, such accelerations may increase 2011-12 and 2012-13 state revenues but could lead to a decrease in the projected growth rate of revenues for 2013-14. Moreover, differences in assumed year-over-year growth rates of revenues will affect the Proposition 98 minimum funding guarantee for schools and community colleges. If stock market trends continue to be positive, these will affect 2013-14 revenues as well.
Definitive data on tax collections and economic trends becomes available on a lagged basis over time. It will take many months until data materializes that provides a solid answer as to how much of this fiscal year's likely revenue gains is related to the income accelerations described above. Accordingly, as is the case with every state revenue projection, the forecast assumptions to be released later this month concerning these income accelerations may prove over time to be incorrect.
Methodology. This note—updated daily during April 2013 and accessible via the LAO home page—contains the most recent collection data provided by FTB and EDD, the state’s two PIT collection agencies. Agency cash data—such as that discussed in this note—is used for state budgetary revenue forecasting and reporting. Agency cash differs from Controller's cash (which is reported in the Controller's state cash flow statements) based principally on the timing of receipts.