Assessing The Recent Drop in Consumer Sentiment May 9, 2025
Real-time economic indicators such as consumer sentiment have declined rapidly in early 2025. A similar decline in consumer sentiment has occurred only nine other times since 1983. These declines usually precede a period of below average growth but also sometimes precede periods of growth that exceed historical averages. Given that concrete measures of economic activity that reflect the current moment will not be available for a few months, we urge policymakers to weigh the risk of both a further downturn and of better than expected growth when making budget decisions.
Updated "Big Three" Revenue Outlook May 9, 2025
Strong Growth This Year, Muted Expectations Moving Forward. Our updated forecast anticipates revenues from the state’s three largest taxes will post strong growth in the current fiscal year. Moving into the budget year, however, our revenue forecast is essentially flat, reflecting mounting risks and headwinds. Total collections across the budget window roughly match the assumptions in the January Governor’s Budget. The timing of those collections, however, is somewhat different, with more revenue attributed to the prior and current years and less revenue expected in the budget year.
Five Guidelines for Using Revenue Forecasts May 9, 2025
As part of building the state budget each year, the Legislature and Governor must make an assumption about how much revenue the state will collect. Because no one knows how much revenue the state will collect next year, leaders must rely on revenue forecasts. Both our office and the Department of Finance (DOF) provide periodic revenue forecasts that can be used for this purpose. These forecasts use the best available data to provide informed estimates of future revenue collections. Although they have limitations, they are important to the state budget process because they offer an objective foundation on which the budget can be built. In this post, we offer guidelines to help make the best use of these revenue forecasts—that is, to help them focus on the right questions, avoid overreactions, and be better positioned for the unexpected.
California New Car Registrations: March 2025 May 9, 2025
Seasonally adjusted new car registrations grew 5 percent from February to March. With this strong growth, March was the fourth highest monthly count of registrations in the last two years. As we track data for the next few months, we will see if this growth continues or if it was a transitory bump in anticipation of tariffs.
Income Tax Withholding Tracker May 5, 2025
Income tax withholding in April came in $90 million (1 percent) below projections included in the 2025-26 Governor's Budget. March and April withholding ran much closer to budget projections than December, January, and February, which each exceeded budget projections by more than 10 percent. The recent trend in withholding appears to represent a slight cooldown compared to the very strong winter months, but collections remain solid by historical standards.
Monthly Jobs Report April 21, 2025
California's traditional jobs report suggests the state shed 12k jobs in March, and the prior month's report was revised down from -7k to -22k jobs. The state's traditional jobs report has shown a net job decline of 55k jobs over the past three months. In contrast, employment numbers from a secondary source, a household survey, have been somewhat more stable. Our hybrid measure that incorporates the household survey and has more closely tracked final jobs data suggests the state has lost 6k jobs over this period.
California Housing Affordability Tracker (1st Quarter 2025) April 21, 2025
Our post provides an updated snapshot of housing affordability in California. Over the last few years, we have seen a rapid increase in California housing costs, led by the dramatic increase in the costs of purchasing a home. Monthly costs for a newly purchased home are about $2,600 higher than they were just a few years ago, driven both by increases in home prices between 2020 and 2022 and an increase in mortgage rates since 2022.
The rapid increase in mortgage rates in 2022 has also left most existing homeowners "locked-in" to mortgages with rates significantly lower than currently available. More than 80 percent of California homeowners have mortgage rates under 5 percent, compared to current rates of about 7 percent. These homeowners face a significant additional financial cost to moving, further limiting the number of homes available for sale.
Inflation Tracker April 21, 2025
March data for the US show annual inflation was similar to pre-pandemic averages. This follows higher inflation readings in January and February, especially in California. Between December 2024 and February 2025, consumer prices grew at an annualized rate of 5.1% in California and 4.2% in the US. Recent surveys suggest that consumers expect significantly higher inflation over the next few years.
California New Car Registrations: February 2025 April 8, 2025
Starting with this post, we plan to publish monthly updates on new car registrations in California, which can be a useful, timely economic indicator. From December 2024 to February 2025, seasonally adjusted new car registrations declined by 8 percent. December registrations, however, had been the highest since mid-2022. As a result, February registrations still were around the average level over the last couple of years.
Annual Revision to Monthly Jobs Survey Shows Far Fewer Job Gains in 2024 March 21, 2025
Each year, the U.S. Bureau of Labor Statistics revises the state's jobs numbers to match actual payroll records from businesses. The latest revisions updates the survey data through September 2024 and lowered California job gains from 260k to 60k over the year. The corrected data show the state's labor market grew just 0.3 percent between September 2023 and September 2024, while the preliminary monthly reports had showed the labor market roughly in line with the rest of the country (about 1.5 percent) over that period.
Cannabis Tax Revenue Update (2024 Q4) March 6, 2025
Our new cannabis tax revenue estimates are very similar to the revenues anticipated by the Governor's Budget.
Firearms and Ammunition Revenue Update February 21, 2025
In the first half of 2024-25, preliminary revenue for the firearms and ammunition excise tax was $29 million.
The 2025-26 Budget: Single Sales Factor for Financial Institutions February 13, 2025
Under current law, most multistate and multinational corporations are required to calculate their California tax liability based on the share of their nationwide sales attributable to California (known as the single sales factor). However, businesses in specific industries have an exemption allowing them to use a three-factor method that equally weights their property, payroll, and sales in California. The Governor's budget proposes to remove this exemption for financial institutions. Our assessment is that there is no clear justification for financial institutions to have an exemption from the single sales factor, either from a fair apportionment or tax incentive perspective. Therefore, our recommendation is that the Legislature approve the Governor's proposal. We also note that although this change may increase state revenues, there is limited support for the notion that a shift to single sales factor apportionment will have significant economic development effects.
The 2025-26 Budget: Partial Income Tax Exclusion for Military Retirement Income February 13, 2025
The Governor proposes to exclude from state income taxation up to $20,000 in annual military retirement benefits. The exclusion would be available to individuals with income below $125,000 ($250,000 for joint taxpayers.) Our assessment is that the economic and fiscal rationale for this proposal is weak. Nonetheless, we recognize that other factors often are relevant to the Legislature’s decisions. In assessing the administration’s proposal, the Legislature will need to decide if these other factors are enough to support this tax change. If the Legislature simply wants to provide limited tax relief to veterans, that might also improve veterans’ perceptions of the state, it could adopt the administration’s proposal. If the Legislature instead prefers that this tax expenditure have a clear economic or fiscal rationale, it could reject the administration’s proposal.
January 2025 Los Angeles Wildfires Impact on Local Property Tax Revenues February 10, 2025
The devastating Los Angeles County fires of January 2025 destroyed thousands of structures, causing significant damage and displacement. This post assesses the implications for property tax revenues. The county faces a $10 billion to $20 billion reduction in assessed property values, estimated to result in a $100 million to $200 million annual property tax revenue loss to affected local governments. The governor's executive order delays tax payments for 218,000 properties until April 2026. By themselves, we expect these delays will have minimal long-term fiscal impacts.