A Big Week for the Franchise Tax Board

Bleary-eyed Californians will be pulling all nighters this week to complete their tax returns.  Their efforts will be critical to the State’s cash coffers. Last year, the five days surrounding the April 15th tax deadline netted $8.1 billion. This represented 65% of the total collected for all of April. Some of last year’s tax surge reflected the impact of higher tax rates approved by voters in November 2012, which were made retroactive to the beginning of the year.

With no change in tax rates during the past year, this year’s personal income tax take is likely to trail last year's. Nevertheless, this will again be a vitally important few days for the State’s finances.

For the 2013 tax year, FTB will likely process roughly 15 million returns from residents. For a little perspective, for the 1947 tax year FTB had 784,709 residents' returns with a liability of $45.4 million. In 2011 (the last year for comparable data), FTB had 15,042,359 returns with a liability of $43.9 billion. That represents an average annual growth rate for returns of nearly 5 percent and for liability of over 11 percent.

For Those Who Can't Make the April 15 Tax Deadline

For those who can’t quite make the April 15 tax deadline this year, the State of California offers an automatic filing extension through October 15, 2014.

Nearly 1.6 million taxpayers had an extension for the 2012 tax year. For those who are unable to make a timely tax return, FTB advises: If the taxpayer is due a refund, he or she must file their return by October 15, 2014. If the taxpayer has a balance due and wants to avoid penalties and interest, he or she must pay the amount owed by April 15, 2014, then file the return by October 15, 2014. (For more details on filing an extension, see FTB's website: https://www.ftb.ca.gov/individuals/faq/ivr/201.shtml).

Withholding Fuels Income Tax Revenues

While many Californians may be waiting until this weekend to complete their tax returns, companies have provided a steadier flow of revenues for the State through their withholdings. For the first 10 days of April, withholding taxes totaled about $1.7 billion. This compared with $1.1 billion in estimated and final tax payments and represented about 60% of the total gross personal income tax receipts deposited so far this month.

Tax filings will ramp up dramatically next week, but withholding taxes will continue to flow into the State’s coffers, providing a good source of support.

Californians Benefit From Refunds

Californians have been submitting their tax returns in recent days with many of the early returners looking forward to refunds. During the first 10 days of April, refunds on personal income taxes (PIT) totaled $1.1 billion. That compares with about $840 million a year ago.

When the State returns money to taxpayers, it is not a complete or permanent revenue loss. This is because refund recipients will turn around and often spend a significant share of their receipts on their homes or purchases for themselves and their families. This spending will both help drive California’s economy and come back fairly quickly in terms of higher retail sales taxes.

So far this month, for every three dollars of personal income tax payments the State has received, it has sent back more than one dollar in refunds. This is similar to the share sent back during the comparable period in 2013. For all of April, the share of refunds to gross PIT will be about half what it has been as fewer of the later filers receive money back. Last year, refunds were equal to 16.5% of gross PIT for the total month.  A similar experience is likely this year.

$2.0 Billion Mark Passed

Although the numbers are still preliminary, April 10^th saw California’s bank account for the month-to-date growing $2.1 billion.  This appears to be a fair start to the monthly forecast of $13.1 billion as the heavy inflow will take place during next week.

Personal income tax receipts are key to California’s fiscal picture.  Through April 10^th, they have reached $1.9 billion.  The forecast for the April total is $10.9 billion.

Retail Tax Receipts Catch Up

Tax receipts are recorded net of various refunds that are paid and retail taxes are no exception.  This month refunds were recorded much earlier than expected and have weighed on the total.

The Board of Equalization (BOE) issues refunds on a daily basis to retailers as they reconcile their remittances.  When customers return merchandise, for example, tax receipts are returned to the merchant.

Periodically, refunds issued on a given day can exceed revenues by a large margin.   Such was the case on April 2 in contrast with last year on April 10.  Now, with at least preliminary numbers available this month for the 10th, comparisons came be made.  The result?  April so far is running virtually identical to last year with refunds exceeding payments by about $86 million.  The big refund bulge is now over and we should generally see positive net cash inflows for the balance of the month

April Tax Collections Reach $1.7 Billion

During the first nine days of April, California took in a net $1.7 billion of tax receipts, dominated by $1.8 billion of personal income tax receipts ("net" totals refers to total reciepts minus refunds paid out to taxpayers).  So far this month, sales tax refunds have outpaced tax receipts, but that performance is expected to change before month-end.

For April as a whole, personal income tax receipts will be the dominant force, accounting for more than 80% of the state’s total tax receipts as individuals file their final returns and make their estimated tax payments.