State Revenue Expected to Rebound in April
February 21, 2019
Tax receipts are lower than expected at this point in the fiscal year; however, both the Department of Finance (DOF) and Legislative Analysts’ Office (LAO) higher revenues in April to partially offset the current shortfall. They agree this is a side effect of the 2018 federal tax reform, causing Californians to pay more of their total tax liability in April instead of December. Additionally, sales tax continues to miss the mark, but could be a product of computer delays at the California Department of Tax and Fee Administration.
The latest DOF Finance Bulletin shows a revenues below estimates by $2.3 billion for the first seven months of the fiscal year, due primarily to low personal income tax (PIT) collections. For the month of January, PIT fell short of budget expectations by $2.7 billion (or 14.2 percent). This could be a sign of an economic slow-down; however, there are good reasons to believe that the administration’s monthly revenue estimates do not properly account for taxpayer behavior in light of changes to the State and Local Tax (SALT) deduction and that income taxes will rebound in April. For further explanation on why this could be the case, see the LAO’s State Tax Collections Report.
Sales and use taxes also came in below expectations in January; however, DOF acknowledges that at least a portion of the shortfall is due to the delayed recognition of some of the receipts. This can be further explained by the introduction of the new Centralized Revenue Opportunity System which replaced the state’s legacy computer systems.
Other economic indicators (e.g., labor market conditions, building activity, and real estate) are experiencing a slight decline. California’s unemployment rate increased 0.1 percent in December after remaining at a historic low of 4.1 percent from September through November, but the labor force participation rate has increased to its highest levels since September 2013. California’s residential building permits are up 0.6 percent from November, but down 22.9 percent from this time last year. Additionally, homes sales are down 4.8 percent from 2017 which is the first drop in four years.
CSAC will continue to keep counties apprised of the state’s financial conditions and what it could mean for the Governor’s Revised 2019-20 Budget expected sometime in May.