California’s Cash Cushion Remains Solid

Buoyed by a relatively good day for personal income tax receipts (PIT) and continued strength on the corporate side, preliminary numbers for April 21 show that California’s total receipts from its three major revenue sources are still exceeding projections by about $2.7 billion.

Monday’s numbers, including weekend dining and spending for Easter, also indicate that retail sales taxes are catching up, with year-to-date receipts only trailing estimates by around $67 million.

The stock market’s performance remains critical to the revenue outcome. Of the capital gains and losses reported in 2011, taxpayers reported stock gains of $29.0 billion. Against these gains, they netted losses of about $15.2 billion. For stocks held less than a year, they reported more losses than gains, showing losses of $5.5 billion and gains of $4.8 billion.  Gains from stocks held longer than a year outstripped losses by $14.5 billion.

 

California No. 1 in Personal Income and 12th in Per Capita Terms

California generated $1.8 trillion in total personal income in 2013, easily surpassing the $1.2 trillion of second place Texas. Adjusted for population size, California’s per capita income was $47,400 last year, ranking it 12th highest in the nation.

Per capita income in Texas ranked a distant 25^th in the nation, although its cost-of-living is significantly lower than that of California. Per capita income in California is about 106% of the national average, which is virtually identical to that of Washington.

California’s per capita personal income rank largely reflects the presence of higher-paying jobs necessary to support the inherent higher cost of land and housing in many parts of the state.

California Looks to Personal Income Growth

California's personal income tax receipts are holding up so far this April despite only moderate growth in personal income during 2013. For April 1-18, 2014, personal income tax receipts (PIT) net of refunds totaled $8.6 billion, according to final figures. This puts the month-to-date total at 80% of the target for the total month, which is essentially identical to the ratio achieved at the same time a year ago.

California’s personal income grew a moderate 2.8% in calendar year 2013 versus a 5.0% gain in 2012. Personal income growth nationally also slowed from 4.2% to 2.6%.
 
Two major forces led to some slowing in income growth last year. First, the two percentage point temporary drop in payroll taxes for Social Security (from 6.2% to 4.2%) that was in effect during 2011 and 2012 ended. Second, individuals tried to shift some income, such as bonus payments, into 2012 before higher federal tax rates went into effect in 2013.  (California’s increase was retroactive to January 1, 2012).

As a result of these changes, wages and salaries net of Social Security taxes rose just 2.1% last year in California. Investment income -- including dividends, interest, and rent – increased by 4.1%. Various transfer payments -- including Social Security, Medicare, veterans’, and unemployment benefits -- also saw a strong 4.0% gain. Overall, last year, California ranked 16th in national income growth and was in the fourth quintile of state
performance.

In addition to growth in the core PIT base, including wages, investment income, and transfer payments, capital gains through the stock and real estate markets are major drivers of PIT.  In his May Revision documentation, many expect the Governor to discuss how much taxable capital gains may add to 2013-14 and 2014-15 revenues. 
 
What makes taxes on capital gains difficult to estimate? There are many reasons, but one important reason is that taxpayers often have discretion about when they “realize” a gain for purposes of taxation. They can defer selling a stock, for example, that has appreciated a year or two, as they manage their investment portfolio. For example, of the $74.7 billion in capital gains reported by taxpayers in 2011, $11.1 billion (15 percent) were from investments held for less than a year. The balance, which could include stocks and real estate, were held for an excess of 12 months. The holding period could be a very long time.  The State’s revenue estimators have a difficult time estimating how much of these holdings have appreciated and when taxpayers might decide to realize their gains.

When trying to anticipate capital gains, revenue estimators must consider investment losses when trying to predict taxable gains, as losses can reduce tax liabilities on investment gains. For example, taxpayers reported capital losses of $25.7 billion in 2011. These losses were used to offset over one-third of the investment gains reported for the tax year.  

This Week's Tax Take Reaches $7.7 Billion

As Californians rushed to meet the April 15th tax deadline, the state saw a strong inflow of funds.  Based on preliminary numbers for Friday, total collections of personal income taxes (PIT), corporate taxes, and sales taxes, totaled approximately $7.7 billion for the five days through April 18th.  This represents nearly 60% of the total goal or projection for the month.  

The Franchise Tax Board’s (FTB’s) statistics can segregate taxpayers by adjusted gross income.  It reports that in 2011 there were nearly 15 million resident returns.  Of these, the “wealthiest” returns--1.5 million (that is, the “top 10 percent”)--had a minimum adjusted gross income (AGI) of about $133,000.  The wealthiest one percent of resident returns listed a minimum AGI of over $460,000. 

 

Of California's three major revenue sources, only retail sales taxes are still falling short of projections, but Easter shopping this weekend could reverse that trend.  Consumers have indicated that they expect to spend an average of $137 for the holiday so perhaps they will be busy this weekend.

 

California Posts Further Job Gains in March

California's economy continues to expand as evidenced by the latest jobs report.  California added nearly 12,000 jobs in March compared with February.  This puts the year-to-year gain at a solid 325,000, or 2.2%, which means that the state is outperforming the nation which recorded a rise of 1.7%.

As last month's job gain was offset by more people entering the work force, the jobless rate held steady at 8.1% between February and March.  This still represents a sizable drop from the 9.2% rate prevailing a year ago.

Job growth has also boosted withholding taxes paid by the state's employers.  So far in April through Friday, the 18th, withholding taxes have totaled $2.5 billion.

FTB segregates capital gains into four major categories:  stocks, residential real estate, non-residential real estate and all other (including nonstick securities, bonds, partnerships and S corporations).  Of the first three categories, stocks showed both the biggest reported gain ($29 billion) and loss ($15 billion) in 2011.

Individual Tax Payments Surpass $1.0 Billion for Third Day

As Californians' tax payments continue to come in and be tabulated, they are quite strong.  Final figures for April 17 show that personal income tax payments net of refunds exceeded $1.0 billion for a third consecutive day.  Corporate tax payments also remain strong and retail sales taxes may be starting to catch up -- probably reflecting late Easter shopping, retail sales taxes as of today, April 18, reached $74 million.  This is about three times the daily volume we have recently seen on a strong day.

Taxes paid on capital gains are likely to receive attention over the next few weeks.  The Franchise Tax Board’s (FTB’s) statistics tell us something about who pays these taxes. In its most recent data, for the 2011 tax year, FTB reports that taxpayers reported $52.1 billion in gains and paid $4.2 billion in tax on those gains.  Over 90 percent of all the gains were reported by taxpayers with adjusted gross income (AGI) in excess of $200,000.  These high-income taxpayers paid over $4.0 billion (96 percent) of the tax on capital gains in 2011.   Taxpayers reporting AGI exceeding $10 million reported $20 billion (38 percent) in capital gains and paid $1.7 billion (39 percent) of the capital gains tax.

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.