Summary of LAO Findings and Recommendations on the 2011-12 Budget

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	Program	Budget Issue	LAO Finding Or Recommendation	Last Updated
Go Back	Revenue	January sales taxes very strong. "Big Three" taxes now $1.6 billion over projections.	Provides report on January 2011 sales and use tax collections based on preliminary State Board of Equalization data.	2-04-11

Detailed Narrative
This is an update on sales and use tax (SUT) receipts based on the Board of Equalization (BOE) preliminary report of January 2011 SUT collections. This update compares SUT collections to the monthly revenue forecast from the Department of Finance (DOF), as updated in January 2011. *January SUT Collections Were Impressively High.* The BOE reports January 2011 SUT collections of $2.8 billion—up $637 million (29 percent) from January 2010 collections and $450 million (19 percent) above the DOF monthly estimate. For the fiscal year to date, SUT collections are now $411 million above the DOF projections. Quarterly SUT returns in January generally reflect sales activity for the October through December quarter, and monthly returns reflect activity for the previous month. Accordingly, this strong SUT report appears to reflect the healthy retail and auto sales environment reported by other sources for the 2010 holiday season. Whether consumer sentiment continues to be as positive in the coming months is an open question and will help determine if and by how much SUT exceeds administration estimates in 2010-11. Monthly SUT tracking (comparisons of results versus forecast and from one year to the next) can be heavily influenced by nuances of the calendar, as return filing dates of businesses are extended to the next business day if they fall on a weekend or state holiday. Accordingly, high collections in one month can be offset by somewhat weaker collections the next month or vice versa. (For example, January 31 is a due date for many returns, and last year, January 31 was a Sunday, perhaps accounting for a spike that year in February collections.) Notwithstanding these issues with tracking SUT trends, the January results seem very promising indeed. The DOF monthly forecast assumes $11.6 billion of SUT collections for the remaining five months of this fiscal year: February through June 2011. During the same five months in 2010, the state's SUT collections totaled $12.3 billion. The Legislature's March 2010 enactment of the "fuel tax swap" complicates year-over-year comparisons. (In its December 2010 Finance Bulletin, DOF also raised concern that some local gas tax revenues related to this swap had been incorrectly allocated to the state in prior SUT monthly reports.) *"Big Three" Tax Collections Now $1.6 Billion Above Year-to-Date DOF Projections.* In our earlier update, we noted that 2010-11 year-to-date personal income tax (PIT) and corporation tax (CT) collections were $1.23 billion above DOF monthly estimates as of the end of January. With these new SUT collection totals, the state's "big three" tax sources now are running $1.64 billion above DOF projections for the fiscal year to date. As we noted in our discussion of PIT and CT results, we counsel caution in assuming that these favorable results will be sustained for the remaining five months of 2010-11, given various uncertainties about both PIT and CT trends. *Methodology.The BOE report upon which this update is based is an "agency cash" report. Agency cash differs from "Controller's cash" (reported in monthly state cash flow statements) based principally on the timing of receipts. Agency cash—not* Controller's cash—is used for state budgetary forecasting and reporting purposes.

Detailed Narrative

This is an update on sales and use tax (SUT) receipts based on the Board of Equalization (BOE) preliminary report of January 2011 SUT collections. This update compares SUT collections to the monthly revenue forecast from the Department of Finance (DOF), as updated in January 2011.

January SUT Collections Were Impressively High. The BOE reports January 2011 SUT collections of $2.8 billion—up $637 million (29 percent) from January 2010 collections and $450 million (19 percent) above the DOF monthly estimate. For the fiscal year to date, SUT collections are now $411 million above the DOF projections.

Quarterly SUT returns in January generally reflect sales activity for the October through December quarter, and monthly returns reflect activity for the previous month. Accordingly, this strong SUT report appears to reflect the healthy retail and auto sales environment reported by other sources for the 2010 holiday season. Whether consumer sentiment continues to be as positive in the coming months is an open question and will help determine if and by how much SUT exceeds administration estimates in 2010-11.

Monthly SUT tracking (comparisons of results versus forecast and from one year to the next) can be heavily influenced by nuances of the calendar, as return filing dates of businesses are extended to the next business day if they fall on a weekend or state holiday. Accordingly, high collections in one month can be offset by somewhat weaker collections the next month or vice versa. (For example, January 31 is a due date for many returns, and last year, January 31 was a Sunday, perhaps accounting for a spike that year in February collections.) Notwithstanding these issues with tracking SUT trends, the January results seem very promising indeed.

The DOF monthly forecast assumes $11.6 billion of SUT collections for the remaining five months of this fiscal year: February through June 2011. During the same five months in 2010, the state's SUT collections totaled $12.3 billion. The Legislature's March 2010 enactment of the "fuel tax swap" complicates year-over-year comparisons. (In its December 2010 Finance Bulletin, DOF also raised concern that some local gas tax revenues related to this swap had been incorrectly allocated to the state in prior SUT monthly reports.)

"Big Three" Tax Collections Now $1.6 Billion Above Year-to-Date DOF Projections. In our earlier update, we noted that 2010-11 year-to-date personal income tax (PIT) and corporation tax (CT) collections were $1.23 billion above DOF monthly estimates as of the end of January. With these new SUT collection totals, the state's "big three" tax sources now are running $1.64 billion above DOF projections for the fiscal year to date. As we noted in our discussion of PIT and CT results, we counsel caution in assuming that these favorable results will be sustained for the remaining five months of 2010-11, given various uncertainties about both PIT and CT trends.

Methodology.The BOE report upon which this update is based is an "agency cash" report. Agency cash differs from "Controller's cash" (reported in monthly state cash flow statements) based principally on the timing of receipts. Agency cash—not Controller's cash—is used for state budgetary forecasting and reporting purposes.