Tax Revenues

Hidden Story: Revenues Are Strong Despite Republicans Rejecting Tax Increases

On January 5th, the Governor released his 2012-13 proposed budget. Because the Governor projected a $9 billion deficit, most news accounts missed an important part of the story - Revenues are actually very strong and are the real reason the deficit has declined so dramatically in the last year.

General Fund Revenues in the 2011-12 Budget:

In June, the state saw a surge in General Fund revenue of $6.6 billion from the January 2011 projections. The Governor’s May Revision Budget included this unanticipated revenue. According to the Department of Finance’s December Revenue Forecast, General Fund Revenues are expected to be $1.8 billion above the Governor's May Revision projections. This means that tax collections are projected to be $8.4 billion more than the Governor's January no-tax increase budget projections. These increased revenues are responsible for roughly half of the reduction of the projected over $20 billion multi-year deficit last January.

Personal Income Taxes (PIT)

Personal income tax collections are $10 billion higher than the Governor's January 2011 budget projections, between the two fiscal years, despite the fact that Republicans rejected the Governor's proposal to extend the 0.25% Personal Income Tax Surcharge.

[1] Legislative Analyst's Office, 2011-12 Budget Overview, Page 14.
[2] 2011-12 Revenue Forecast/Determination, Department of Finance letter to Budget Chairs and Vice Chairs, December 13, 2011, Attachment, Page 3.
[3] Legislative Analyst's Office, 2011 Fiscal Outlook Page 19.

Sales and Use Taxes

Sales and Use tax receipts are slightly down over projections. This is primarily due to the Amazon compromise adopted at the end of session. Sales taxes are down $232 million, with the Amazon bill accounting for $200 million of the lost revenues.

Sales and Use tax receipts are still very strong. The Board of Equalization recently reported that taxable sales grew at an 8% clip in the first quarter. This robust growth has offset most of the 1% rate drop associated with the 2009 temporary tax increase ending on June 30th. (The State Sales and Use tax rate increase of 1% sunset on June 30, 2011.) However, year over year numbers are distorted by the Governor's realignment proposal, which diverted $5.1 billion of the state sales tax from the state General Fund to local agencies to fund realignment.

[1] 2011-12 Governor's Budget Summary, Page 11.
[2] 2011-12 Revenue Forecast/Determination, Department of Finance letter to Budget Chairs and Vice Chairs, December 13, 2011. Attachment, Page 7.
[3] Legislative Analyst's Office, Fiscal Outlook, Page 15.

Corporate Taxes

Corporate taxes are projected to be up by $467 million. LAO had projected corporate tax collections to be relatively flat.

5 Year Forecast: Revenues Going Forward

The Legislative Analyst's five year forecast also included positive revenue news. Over the forecast period, "Big 3" General Fund revenues are expected to grow on an average of 5.7% a year. This increase in tax collections is happening despite the fact that tax increases were rejected by Republicans. Note: Personal income, the amount of money families are expected to take home in 2012-13, is expected to grow 5.1% throughout the forecast period. This means revenues are expected to grow as family income grows.

 [1] Legislative Analyst's Office, 2011 Fiscal Outlook

General Fund Revenues in the 2012-13 Budget:

Big 3 tax revenues, Personal Income Taxes, Sales and Use Tax and Corporation taxes, make up 80% of tax receipts in any given year. The Governor’s January budget projects that these tax revenues will grow $4.5 billion or 6% in the 2012-13 budget year without tax increases. The major growth comes from Personal Income Tax receipts which are expected to be up $4.1 billion.

Governor’s Proposed $6.9 billion tax increase

The Governor’s budget relies on voters supporting a ballot measure to raise the state sales tax by .50% and increase Personal Income Tax rates. Because the Personal Income Tax Rate increase is retroactive to January 1, the tax increase is expected to cost taxpayers $2.2 billion in 2012. In the 2012-13 budget year, the Governor’s budget assumes taxpayers will pay an additional $4.7 billion. These tax rate increases would be for 5 years.

Will there be more revenue?

Recent comments by Senate President Pro Tem Darrell Steinberg suggest that the Democrat leadership in the Legislature believes that tax revenues will grow even more. "Why would we make cuts that are going to harm people and harm the economy in March when in fact in May there's a real not just possibility, but if the trend continues, a probability that the deficit number is going to be less,’ the Sacramento Democrat told reporters, pointing to improvement in a revenue forecast made in December.” (Source: Sacramento Bee, January 5, 2012.) In addition, at least one economist who advises the California State Controller, Chris Thornberg, believes tax revenue in the upcoming fiscal year could top Brown's forecast by around $4 billion. (Source: Sacramento Bee, January 6, 2012).

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