Below is additional detail about the Legislative Analyst’s Office (LAO) May 2012 economic and revenue forecast.

Economic Forecast

Key Economic Variables. Figure 1 displays the key economic variables for the U.S. and California included in our May 2012 forecast. As discussed in The 2012-13 Budget: Overview of the May Revision, our forecast—along with those of the Governor (as prepared by the Department of Finance) and many other mainstream forecasters—makes various assumptions about federal tax and fiscal policies. One key assumption is that Congress and the President will agree, in effect, to extend the “Bush tax cuts,” payroll tax cuts, and certain current-law deadlines related to budget sequestration cuts for federal domestic and defense programs. To the extent that federal actions differ from these assumptions, economic and revenue results could be materially different from our forecast--potentially lower or higher by billions of dollars in 2012-13 alone.

Comparisons With Recent Forecasts. Figure 2 compares the LAO’s key May 2012 economic forecast variables for calendar years 2012 and 2013 with those included in (1) the 2012-13 Governor’s Budget in January 2012, (2) the LAO’s February 2012 forecast, and (3) the Governor’s May Revision of May 14, 2012. Comparisons of the May forecasts are difficult because of the differing treatments of personal income related to Facebook, Inc.’s initial public offering (IPO), as discussed in the footnotes of the figure.

Revenue Forecasts

The LAO’s May 2012 revenue forecast is included in the May Revision Overview (see Figure 4 of that publication).

Comparisons With Recent Forecasts. Figure 3 compares the LAO May 2012 revenue forecast for 2011-12 and 2012-13 with those included in the Governor’s January 2012 budget proposal, the LAO’s February 2012 forecast, and the Governor’s May Revision. The forecasts displayed each reflect estimates of the revenue that would be received assuming passage of all of the Governor’s budget proposals as of that point in time, including his proposed tax initiatives. The January and February forecasts reflect the Governor’s earlier tax initiative, while the May forecasts reflect the Governor’s revised tax initiative. Currently, the Governor’s revenue forecasts are just hundreds of millions of dollars above our office’s in 2011-12 and 2012-13. In later fiscal years, the forecasts diverge, with the administration’s revenue forecast above that of our office. In 2013-14, our revenue forecast is now $1.3 billion lower than the administration's. In 2014-15 and 2015-16 (the last year of the administration's multiyear forecast), we now forecast revenues to be around $3.5 billion to $4 billion lower than the administration each year.

Figure 4 compares the LAO May 2012 personal income tax forecasts for 2011-12 and 2012-13 with other recent forecasts.

Figure 5 compares the LAO May 2012 sales and use tax forecasts for 2011-12 and 2012-13 with other recent forecasts.

Figure 6 compares the LAO May 2012 revenue estimate related to the Facebook IPO with those in other recent forecasts. The IPO was announced in February and thus was not included in the Governor’s January 2012 forecast. (Additional information on our May 2012 Facebook IPO revenue forecast was published on this website on May 15.)

Governor’s Revised Tax Initiative. Figure 7 displays the LAO May 2012 revenue estimate related to the Governor’s revised tax initiative.