Jelly Beans and Chocolate Bunnies

Retail sales tax receipts have received a boost this week related to Easter shopping, although it has not been dramatic.  Through Thursday, April 17, sales taxes net of refunds (such as for returned merchandise) have totaled about $64 million.  So far this fiscal year, sales taxes are the only one of California’s major three revenue generators (Including personal income and corporate taxes) not meeting expectations.

Hopefully, Californians will spend more before Sunday arrives.  Recent surveys by the National Retail Federation (NRF) suggest that American consumers will spend nearly $16 billion on purchases related to the Easter holiday this year.  Based on California’s 13% of the nation’s total income, California Easter sales should equal about $2 billion. 

 

NRF research indicates that Americans on average will spend $137 on Easter related purchases.  Food represents about one-third of this spending, with dollars going to both restaurants and grocery stores.  Apparel, gifts, and candy follow in terms of major Easter spending categories.  Consumers also will be doing more of their shopping online.   

 

With about 80% of Americans celebrating Easter in some way this year, the performance of sales this week will provide a significant barometer on consumer sentiment.  This will be important to California’s second most important revenue source.

Credits add up

State law allows for special credits to reduce personal income tax liability.  These credit provide tax preferences for a large range of activities, including providing child and dependent care, installing solar systems, and buying a new home.  In 2011, taxpayers claimed these credits at a combined value of $1.4 billion.  

A Surge in Tax Receipts

Today was very strong in terms of California's tax take, according to preliminary figures. April 16 receipts of California's three major revenue engines -- personal income taxes (PIT), corporate income taxes, and retail sales receipts -- reached $3.1 billion. This brings the month-to-date total to $7.3 billion, or 56%, of the total expected for the month.

Today's collection of PIT led the surge, totaling $2.5 billion for the day. This was virtually identical to last year's tax take and appears surprising since a change in tax rates probably boosted last April's figure. Some caution is warranted due to revisions that could take place tonight, but if the numbers stand close to this reading it is good news for California's bottom line.

Also worth noting: Not only individuals and households filed their income tax returns yesterday. Sole proprietorships file under the income tax system as well. In 2011, 2.2 million sole proprietorships filed with FTB, and were assessed $9.8 billion in taxes. Of this tax assessed, service firms account for about $5.8 billion (59 percent). These firms could provide technical, scientific, administrative or health services. Firms specializing in finance, investment and real estate owed $1.4 billion (14 percent), while firms specializing in retail and wholesale trade had assessments of about $600 million (6 percent). FTB assessed another 500,000 firms $1.1 billion (11 percent), but FTB was unable to determine the nature of the sole proprietorship's business.

See How 'Tax Gap' Affects State

Hey! You've got to hide your love away. The Franchise Tax Board (FTB) reports that California taxpayers underreport and underpay about $10 billion in "personal and business taxes" each year. Most of the yearly "tax gap" -- $8 billion -- occurs when taxpayers file their return but either underreport their income or overstate their deductions. FTB ascribes another $1 billion of the annual gap to underpayments. The agency also believes that collections fall short by another $1 billion each year because taxpayers fail to file a timely tax return.
 
The tax board notes that the tax gap affects all Californians, saying that when some taxpayers fail "to pay what they owe [then] the rest of us bear an additional burden. This [higher burden] can come in the form of higher fees and taxes, fewer government services, or budget deficits -- or all three."

A Billion Dollars Arrive on April 15

They may have been procrastinating, but California taxpayers came through on April 15th as they paid $1.0 billion in estimated and final tax payments. With refunds and withholding taxes for the day offsetting each other, net personal income tax (PIT) receipts also equaled $1.0 billion.  This compared with last year's April 15th figure of $850 million.

Yesterday's tax surge put the State's cash tally in terms of its three major revenue sources -- PIT, corporate income, and sales taxes -- at about $67.7 billion for the fiscal year to date (July 1, 2013 through April 15, 2014). This is $1.6 billion more than projected based on the Governor's Budget released in January.

PIT is running about $1.0 billion, or 2.2%, above projections. Corporate tax revenues are more than $700 million, or 16.8%, above expectations. Retail sales are the only category still behind forecasts, although the 0.7% miss amounts to only about $100 million.
 
Also worth noting: Taxpayers pay a rising tax rate on incremental increases of income. Because of the rising rates, high-income taxpayers will not pay the topmost tax rate on all their income today. Consider for example, the effective tax rate paid in 2011 by the 671,290 taxpayers with adjusted gross incomes above $200,000.(Note: 2011 reflects a tax year prior to the imposition of the Proposition 30 levy.) Of these high-income taxpayers, 334,834 (50 percent) paid at a tax rate between 5.0 percent and 6.9 percent. Another 228,388 (34 percent) paid between 7.0 percent and 8.9 percent.  Fewer than 25,000 taxpayers (4 percent) paid at a tax rate exceeding 8.9 percent. At the other end of the scale, 83,549 high-income taxpayers (12 percent) paid a tax rate of between 0.0 percent and 4.9 percent.

Many Filers Don't Have To Pay

Not all who file shall pay. Many people filing tax returns today will escape having any tax liability. They may qualify for refundable credits that exceed their tax liability. Or they may find that after making various tax adjustments (such as deductions and credits), their entire tax liability has been eliminated.

Consider that in 2011, 15.0 million resident taxpayers filed returns, but 6.5 million (43 percent) had no tax liability. Nearly all of the non-taxable returns were filed by those reporting adjusted gross incomes (AGI) of less than $50,000. Comparing the returns by AGI, the nontaxable returns are predominately among the lower AGI classes.

• Of the 9.5 million returns reporting AGI less than $50,000, 6.1 million (65 percent) had no tax liability.
• Of the 3.1 million returns reporting AGI between $50,000 and $100,000, 300,000 (10 percent) had no tax liability.
• Of the 1.7 million returns reporting AGI between $100,000 and $200,000, less than 11,000 (1 percent) had no tax liability.
• Of the 700,000 returns reporting AGI exceeding $200,000, less than 2,400 (0 percent) had no tax liability.

April 15th Arrives

Today, in case anyone needed the reminder, is income tax day. We expect more than 8 million resident taxpayers will have liabilities due today. Most tax liabilities will be less than $1,000.

According to the Franchise Tax Board’s latest annual report, 8.5 million resident taxpayers had a liability in 2011. Of those, 3.8 million (45 percent) had liabilities of up to $1,000, and another 1.3 million (15 percent) paid between $1,000 and $2,000. For 2.0 million (23 percent) other taxpayers, tax liabilities ranged from $2,000 and $6,000. The rest, about  1.4 million (17 percent), had liabilities exceeding $6,000.

With many taxpayers struggling until the end to meet the filing deadline, the heaviest cash flows can be expected tomorrow and Thursday. Last year, reflecting the impact of capital gains, an improving economy, and higher tax rates, April tax receipts peaked on the 16th of the month at $2.7 billion. This number includes withholding taxes filed by companies in addition to estimated and final tax payments but does not reflect the impact of refunds. With tax rates holding steady during the past year, this year's peak for the month is likely to be much less than last year, but it is still expected to be close to or surpass $1.5 billion.