California’s Tax Revenue Projections Weakening As Newsom’s Budget Revision Deadline Looms

Authored by Travis Gillmore via The Epoch Times (emphasis ours),

With the state facing a record-high budget deficit, tax collections are failing to meet California Gov. Gavin Newsom’s budget proposal projections, which could put further pressure on the state’s finances.

California Gov. Gavin Newsom speaks in Los Angeles on Jan. 3, 2024. (John Fredricks/The Epoch Times)

As of April 25, the state’s franchise tax board is showing personal income tax collections on track to approximately match estimates for the month.

However, corporate tax revenues of $4.16 billion equate to more than $500 million below forecasts for the month and are off by $1.4 billion for the fiscal year.

Some economists point to disruptions in the technology industry—with thousands of California jobs slashed across several companies in recent months—as a contributing factor in declining corporate and personal income taxes.

“The loss of tech jobs has also hurt California’s public finances, which have grown heavily dependent on Silicon Valley,” Joseph Politano, independent writer for online data and economy newsletter Apricitas Economics, posted April 14 on Substack. “It will mean less future potential revenue—forcing the state to raise tax rates or pare back spending on investment, social services, and more.”

Sales and use taxes are also driving the shortfall, missing estimates by $1 billion since November.

In March, such receipts came in $653 million below forecast, which the finance department said, “reflect ongoing weakness in taxable sales.”

Data analysts blamed inflation and high-interest rates, in part, for the lackluster sales tax collections, as cash-strapped consumers are managing their finances by reducing spending on some items.

“This decline reflects consumer challenges balancing higher prices and financing costs with essential household needs,” Andy Nickerson, president and CEO of HdL Companies—a data and consulting services provider for local governments—said in an April 16 tax report summary. “As the Federal Reserve considers a delay in softening rates, [we anticipate] consumer spending may continue to stagnate, delaying a return to normal historical growth trends in 2024.”

Cumulative March tax receipts came in $243 million below estimates and contributed to a $5.8 billion shortfall since November—representing a 4 percent miss—according to a recently released report from the state’s Department of Finance.

While personal income tax receipts exceeded expectations in March, estimated payments since November were down $4.7 billion, suggesting weakness in tax collections for the 2023 tax year, the finance department reported.

With the income tax due date of April 15, more details will be available in the first week of May once calculations are complete. Preliminary information from the state’s controller’s office suggests the governor’s estimate could be $6 billion or more higher than actual revenues collected.

While Mr. Newsom’s January proposal was based on forecasts, a revision due in May will be able to incorporate receipts received, which should provide more clarity.

“All of these results suggest that April revenues, in the aggregate, may come in several hundred million dollars below monthly estimates,” Jason Sisney, budget director for Assembly Speaker Robert Rivas, said in a Substack post April 25. “It is virtually certain that the May Revision will downgrade revenue projections from those the Governor released in January.”

Mr. Newsom is expected to provide the revision on or before the May 14 deadline.

The nonpartisan Legislative Analyst’s Office predicted earlier this year after weak tax collections in January that revenues would miss the governor’s estimates by about $16 billion for the 2023–2024 fiscal year and another $9 billion for 2024–2025.

But following personal income tax revenues in February and March that were closer to estimate, Mr. Sisney believes the shortfall will not be as large as the analyst’s office suggested.

“Based on revenue trends to date … it is difficult for me to see revenues dropping quite that much,” he said.

Disparities in estimates between the governor and the analyst’s office have existed since January regarding the severity of the budget deficit.

Mr. Newsom estimates a $38 billion shortfall, while analysts forecast a $73 billion gap in funding. Some of the differences lie in the governor’s calculation of solutions proposed, which the analyst’s office says accounts for about $20 billion of the discrepancy.

With the numbers in flux, lawmakers and policy experts are awaiting final totals so that budget proposals can be debated in earnest.

Mr. Newsom recently approved a “budget bill junior” crafted by Democratic lawmakers as an early action plan to address a portion of the deficit.

Approximately $17 billion to chip away at the deficit—including deferrals, delays, borrowing, and some $3.6 billion cuts—primarily to one-time funding—were enacted by his signing of Assembly Bill 106 on April 15.