|Budget Issue:||Overall, California's January income taxes on target|
|Finding or Recommendation:||This note provides an update on 2014 California income tax collections.|
Overall, January 2014 Income Taxes On Target. California state income tax collections were basically on target in January 2014, with personal income tax (PIT) collections slightly below the administration's updated monthly projections and corporation tax (CT) collections somewhat above projections. As the Legislative Analyst discussed before the Senate Budget and Fiscal Review Committee on January 23, the very strong trend of PIT estimated payments in December (resulting largely from 2013 capital gains and business income) did not continue into January. PIT withholding, however, continued to outperform expectations. For the months of December and January combined—when PIT estimated payments for the fourth quarter of 2013 are due—estimated payments appear to have been roughly in line with expectations of our office.
Updated LAO Revenue Outlook. For the 2013-14 fiscal year, our office's November 2013 revenue projections were $1.9 billion higher than the administration's updated January 2014 projections for the General Fund's "Big Three" PIT, CT, and sales taxes. A $1.9 billion difference is not a large one in the context of the state's approximately $100 billion annual budget, especially given the volatility and unpredictability of PIT taxes related to capital gains and business income, as well as corporate taxes. In order for our office's 2013-14 revenue forecast to prove closer to correct than the administration's, PIT estimated payments in April and June 2014—generated from taxpayers' expected 2014 capital gains, business, and other income—likely will need to be higher than the administration now projects for those months. Since November 2013, stock prices have generally been above the level our office assumed in the November revenue forecast; only recently have stock prices dropped back to levels in line with our forecast assumptions. (Our office's November forecast assumed that the S&P 500 stock index would remain near its October 25 level of 1760 through March before resuming slow growth thereafter.) Further drops in stock prices, if they were to occur, would make it more difficult for the state to outperform the administration's revenue projections.
Both our office and the administration will release new state revenue projections in May.
The following data results from tracking daily agency cash collection reports of the state's two income tax agencies, the Franchise Tax Board and the Employment Development Department. The data is preliminary and is subject to change as the agencies review and reconcile monthly data. (Agency cash is the method used to track state budgetary revenues, and collection data for income and other taxes is summarized midway through the month by the Department of Finance in its Finance Bulletin.)
Updated Administration Projections. Through the end of December, 2013-14 PIT collections had exceeded the administration's June 2013 budget act projections by $2 billion. The data below, however, refer to the administration's updated January 2014 projections for revenues, which were released on January 9 along with the Governor's 2014-15 state budget proposal. Per custom, the administration's updated January projections essentially "true up" July through December revenue collections with actual collections for those months.
Personal Income Taxes. The administration's updated projections anticipated $9.87 billion of PIT collections (all funds) in January. Daily reports from tax agencies indicate that actual collections totaled $9.81 billion. PIT withholding was about $500 million (10 percent) above the administration's updated projections, while PIT estimated and other payments for the month of January were about $725 million (13 percent) below the administration's projections. PIT refunds generally got off to a slower start in January than the administration assumed—finishing about $160 million below projections.
For the months of December 2013 and January 2014 combined, PIT estimated and other non-withholding payments were 28 percent below collections during the same two-month period last year. This is roughly in line with what our office expected in our November forecast, given that our office—like the administration—anticipated a large drop in capital gains-related taxes for calendar year 2013, due largely to changes in federal tax policy that caused many high-income earners to "accelerate" income into 2012.
For the rest of 2013-14, the administration's updated PIT withholding projections seem reasonable, as the projections assume 5.7 percent growth over last year. The administration's updated projections assume that PIT estimated payments for the rest of 2013-14 rise by 10.4 percent over last year. In our office's November 2013 forecast, we anticipated higher PIT estimated payment collections in April and June 2014 than the administration does currently. Our projection reflected our assumptions for stock prices, described earlier, as well as the fact that capital gains in 2013 were assumed to be depressed due to the acceleration of income to 2012 described above.
Corporation Taxes. The administration's updated projections anticipated $350 million of CT collections in January and $280 million of refunds, for a net amount of $70 million. Tax agency data indicates that collections actually totaled $321 million, with just $75 million of refunds, for a net amount of $246 million—about $175 million above the administration's updated projections.
Lower refunds in 2013-14 actually help state budgetary revenues booked to the 2012-13 fiscal year, as standard state accrual techniques accrue almost all CT refunds back one fiscal year.