June, Not April, Now the Month to Watch for State Revenue

While June has always been a significant month for state tax collections, it’s even more important in 2010 because of budget-related changes in the percentage of estimated tax payments Californians make each quarter.

Traditionally, April with its income tax deadline has been the state’s biggest revenue collection month.

About 50 percent of the state’s cash-starved general fund comes from income taxes, 17 percent of which are collected in April.

June, historically, has brought in 10 percent of that total.

But in an effort to pull more future income into the current and previous fiscal year to close budget gaps, lawmakers and Gov. Arnold Schwarzenegger front-loaded estimated payments so that 70 percent are made before the end of the fiscal year June 30 – 30 percent in April, 40 percent in June.

“June has historically been a big month for cash but because of the change the payment schedule, it’s going to be even more important,” said H.D. Palmer, spokesman for Schwarzenegger’s Department of Finance.

Income taxes and bank and corporations taxes collected in June will be used to help staunch a $19.1 billion gap between revenues and spending commitments.

If the payments exceed estimates, the gap narrows. If collections fall short, the gap widens.

As yet unreleased publicly, the Schwarzenegger administration’s revised estimates for June show income tax collections of nearly $6 billion and bank and corporation tax receipts of nearly $2.2 billion.

Another $3 billion is expected in sales tax receipts for a total of $11.2 billion – down from he $12.5 billion predicted in the GOP governor’s January budget.

April saw income tax receipts of $7.5 billion — $3 billion less than Schwarzenegger predicted in his January budget plan. Bank and corporations taxes were also $300 million short of the $1.9 billion estimate by the GOP governor.

Traditionally, taxpayers calculated their tax liability for the year and paid 25 percent of it each quarter – in April, June, September and December. The day of reckoning being April 15 of the following year. If the payments fell below obligations, the taxpayer paid a penalty.

The penalties remain but the payment schedule has been sharply changed. In 2008, to bring in more cash sooner, the percentages were changed to 30 percent in April, 30 percent in June and 20 percent each month in September and December.

But to draw in even more revenue sooner that was changed, effective the 2010 tax year, to 30 percent in April, 40 percent in June, zero in September and the remaining 30 percent in December.

In its assessment of Schwarzenegger’s revised budget presented May 14, the Legislative Analyst notes the importance of June, given the new 40 percent payment level.

“This policy change, combined with April’s weak receipts, means that June 2010 now is expected to be the state’s largest revenue collection month (for the current fiscal year),” the analyst wrote. “June’s actual receipts will help clarify the state’s revenue outlook for the upcoming year.”

Part of the reason April collections were lower than expected is that taxpayers settled up in the final quarter of 2009, rather than waiting until April.

Deputy Legislative Analyst Michael Cohen expects similar phenomenon this year – if payment levels are low in June, the difference will be made up in December.

But he says there could be short-term effect on the state’s cash flow if June payments fall below estimates.

“It could make a difference in our cash situation,” Cohen said. “The weaker June is, the more the agencies monitoring the state’s cash situation are going to get nervous about a protracted budget impasse.”

The analyst’s estimate is that the state’s stream of cash will begin to dry up in mid-to-late August – if revenues in May, June and July come in as predicted. Sooner if they don’t.

Earlier in the year, the Legislature approved a bill that gives the state controller and state treasurer greater latitude in managing the state’s cash, including deferring payments to schools and other entities to help the state avoid issuing IOUs as it did last year.

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