April Tax Collections — Three Days to Go

With three days left in April, the Franchise Tax Board reports personal income tax collections of $7.4 billion — $1.5 billion short of the amount state budget writers predict California will collect.

Corporate tax collections – expected to reach $2.3 billion this month — are at $1.5 billion as of April 27. The state will also be paying out at least $2.5 billion in income tax refunds.

April is crucial to the state’s fiscal health because it’s the month with the highest personal income tax collections. Lower-than-anticipated revenues worsen the budge outlook. Better-than-expected collections brighten it.

Gov. Arnold Schwarzenegger signed an unprecedented 18-month budget on February 20, which through more than $15.5 billion in spending reductions and more than $12.2 billion in temporary tax increases was aimed at temporarily closing a $42 billion gap between revenue and spending commitments.

Within two weeks, the Legislative Analyst said that the budget was $8 billion short, a situation that will be exacerbated if voters do not approve $5.8 billion in budget balancing proposals on a special May 19 election ballot.

And, because a number of the spending cuts and tax increases in the current budget are temporary, the Legislative Analyst predicts the fiscal year beginning July 1, 2010 will have a $12.6 billion shortfall that would double, absent any action by lawmakers and the governor, to $26 billion in the fiscal year starting July 1, 2013.

The amount and volume of tax returns is affected by both California’s mired economy and the structure of its tax system.

Statewide unemployment was 11.2 percent in March – a nearly 5 percent increase over March 2008. The number of Californians employed was 16.5 million, down 578,000 from March 2008. The number of unemployed Californians was just over 2 million in March up 913,000 from one year ago.

Compounding the state’s recurrent revenue problems is the structure of the tax system, which is skewed toward high income Californians.

Than condition magnifies the impact of a economic events. For example, during the Dot Com boom, higher income Californians were cashing out their stock. Those capital gains provided the state with double-digit, billion dollar surpluses.

Today, in an environment in which every category of investor has lost more than 20 percent of value, there will be far less income from this class of taxpayer.

To see how dependant California is on wealthier taxpayers, in the 2005 tax year — taxes paid in 2006 on 2005 income — $35.5 billion of the $43.1 billion total income taxes collected came from persons earning $100,000 or more.

Of that $35.5 billion, $15.7 billion came from Californians with taxable interest of $1 million or more — $9 billion of which came from taxpayers earning $5 million or more. 

During the 2006 tax year, $38.4 billion of $45.7 billion came from taxpayers with adjusted gross incomes of $100,000 or more. Of the $38.4 billion, nearly half — $17.1 billion – came from taxpayers earning $1 million or more, $9.7 billion of which from those at $5 million or above.

-30-