Tax Receipts on a Winning Streak

March madness is ending with revenues flowing into state coffers at a good pace.  Based on preliminary estimates through March 28, tax receipts from California’s three major revenue sources have totaled $5.8 billion, exceeding estimates for the total month by over $100 million.  This will represent the close for the month because of the upcoming weekend and the Cesar Chavez State Holiday on Monday.  The March number could be revised significantly when released on Tuesday after any corrections are made and auditing is completed.  Looking at the fiscal year-to-date, numbers through March show that total revenues are ahead of Budget projections by about $1.3 billion or 2.2%.  This is a nice margin to have if it lasts.

Budget projections are difficult to make.  Keep in mind that current projections contained in the Governor’s new budget presented early this year were based on actual data that was already available for about half the fiscal year.   When the focus shifts to Fiscal Year 2014-15, with the release of the May Revision of the Budget, revenue numbers will solely reflect projections.

How precise are General Fund revenue estimates?  Given the range of variables that affect revenues—including the economy, the weather, and changes in federal law or taxpayer behavior—the estimating error can easily rise.  One study found that if the estimators could control for variations in the economy, the estimating error would hover around 5.0 percent.   The consequences for this built-in error rate can have a big effect on budget planning, deficits, and the health of the General Fund. 

By way of comparison, the 2013 American League batting champion, Miguel Cabrera, got on base 1.7 percent more often than did the National League’s champion, Michael Cuddyer.  If budget projections could be limited to just that much difference between estimates and actuals, even then the revenue swing would be nearly $2 billion.  A $2 billion “windfall” is a happy, healthy gain.  A $2 billion “shortfall” can have immediate and long-term consequences to many programs supported by the General Fund.

Retail Sales Perk Up

After lagging behind projections during most of March, retail sales may be picking up as the month comes to an end.  During the last two days (March 27 and 28), month-to-date totals have exceeded forecasts.  With weekend sales still to be tallied, tax receipts are at 99.8% of the target for the month as a whole.

Sales tax receipts during the past week are also running well ahead of a year ago.  This is impressive since Easter fell at the end of March last year (March 31) but will not occur this year until the latter part of this April (April 20).

The Tax Tracker reports revenue collected from the corporate, sales and personal income taxes, irrespective of into which account the revenue is deposited.  For example, the proceeds of a surcharge on high-income taxpayers is earmarked for mental health services.   Because a piece of the income and sales taxes are earmarked for specific programs, the general progress of annual collections are as important to those who monitor these programs as well as it is to those watching the health of the General Fund.

March Revenues Reach Target Before Month-End

Supported by continued gains in jobs, income, and capital gains, revenues through March 27 from California’s top three tax sources have already surpassed the projections for the total month.  With a few days left to go, the total is at 100.5% of the target for all of March.

Personal income tax collections have not quite reached their month-end target, but as more individuals file their returns, the goal should be reached.  Retail sales taxes are also close to their target.  Meanwhile, corporate tax receipts are running well ahead of plan, with the sum through March 27 already equal to 107.6% of the total month’s projection.

The third quarter of 2013-14 closes with March.  It can include a great deal of information about how revenues are performing for the year.  It includes the results of the late holiday retail sales and the final payments on most Corporate tax accounts.  Budget writers can use this information to begin assessing the likelihood of meeting the budget estimates for two of the three main General Fund revenue sources.  Through March 27, total net revenues are running $1.5 billion above the projections for the fiscal year to date. 

March appears to be headed for a strong finish in personal income and corporate tax payments.   For the month through March 27, personal income taxes (net of refunds) totaled $2.7 billion, a gain of $292 million from a year ago and $161 million above estimates.  Capital gains have been substantial, with stock prices up 18% over the past year accompanied by a 21% climb in home prices.

For much of the month of March, corporate income taxes have been outperforming estimates.  For the month through March 27, corporate taxes totaled $1.5 billion, a number $108 million above estimates.  This outperformance reflects the improvement in the operating profits of many companies and the ending of write-offs from prior years’ losses.

Yesterday was the 19th working day of the month. Compared to last year, cumulative monthly collections for the three major taxes have been consistently higher since mid-March.  If collections continue at this pace, the state can expect to collect over $6 billion in March, generating roughly $700 million more than last year, and posting a 13% year-over-year change

Revenues Beating Estimates

For the fiscal year through March 26, revenues from California’s three major sources (Personal Income tax, Corporate tax, and Sales tax), totaled $62.6 billion.  This is $920 million above estimates.  Although sales taxes are trailing estimates, personal income and corporate taxes are well ahead of projections.

March is a telling month for the corporate tax, as the law requires most businesses to make their final corporate tax payments on or before March 15.  After accounting for calendar anomalies and processing delays, the days immediately following the due date tend to have the highest collections.   On March 18, 2013 for example, the state received $787 million of the $1.6 billion (49%) it would collect for the entire month. 

By March 23 of last year, the state had collected 95% of the month’s corporate tax revenues.  If that same collection rate applies in the current year, the state can expect to collect $1.4 billion from the tax, which is slightly above what the Department of Finance had estimated for net March receipts.