State Budget

State Revenue Could Outpace Projections by $39 Billion, Analyst Says

State revenue “could end up $33 billion to $39 billion higher than the Governor’s Budget assumes,” the Legislative Analyst’s Office (LAO) reported April 21 based on tax collections through April 20.

“Our estimates suggest that it is virtually certain that collections from the state’s ‘big three’ taxes – personal income, sales, and corporation taxes – will significantly exceed the Governor’s Budget assumption of $185 billion in 2021-22,” the LAO wrote. “Currently, our best estimate is that there will be somewhere between $33 billion and $39 billion in unanticipated revenue. We caution that the implications of unanticipated revenues for the state’s budget are not straightforward. … [W]e expect the Legislature very likely will face additional, significant constraints this year due to the requirements of the State Appropriations Limit.”

The State Appropriations Limit (the “Gann limit”), enshrined in the state constitution, sets a spending limit based on changes in population and the cost of living, and provides that if the state has revenue above the limit over two consecutive years, the state must divide excess revenue between rebates to taxpayers and additional spending on schools. Most state appropriations are subject to the limit, but there are exemptions for spending on capital outlay, local government subventions, and debt service.

In February, the LAO noted that under the current fiscal situation: “[F]or each additional $1 revenue collected (especially in the current year), total constitutional requirements could increase by around $1.60. Counterintuitively, the dynamics are such this year that if revenues exceed expectations, Legislative flexibility over the surplus could decrease substantially.” The analyst recommended then that the Legislature consider meeting the requirements of the spending limit by reducing tax revenue, providing more subventions to local governments, spending more on infrastructure that is exempt from the limit, and/or spending more on emergencies. Spending on emergencies is exempt from the limit if it is related to an emergency declared by the governor, approved by at least two-thirds of the Legislature, and dedicated to an account for expenditures relating to the specified emergency.

“We think that some existing Governor’s budget proposals – such as the proposal to repay the Unemployment Insurance loan from the federal government – could be excluded as long as the funding was approved with a two-thirds vote,” the analyst wrote in February.

Jason Sisney, a budget advisor to Assembly Speaker Anthony Rendon, noted on social media that April 20 was “another of the largest tax collection days ever at FTB,” with $7 billion in personal income tax and $541 million in corporate income tax receipts logged for the day.

In its April Finance Bulletin, the Department of Finance reported that a substantial amount of the state’s unexpected revenue might be attributed to the 2021 tax change designed to get around the $10,000 cap on the federal deduction for state and local taxes. The department wrote:

“Of note, $5.446 billion of the total additional revenue through nine months is due to higher-than-expected Pass-Through Entity (PTE) elective tax payments under the corporation tax, a 2021 state tax change designed to allow some taxpayers to reduce their allowable federal tax liability starting with their 2021 tax returns. Every dollar received from the PTE elective tax paid generates a dollar of personal income tax credit. While the amount of PTE elective tax payments can be tracked in monthly cash reports, the extent to which taxpayers will reduce their personal income tax payments to reflect the elective tax credits cannot be determined until tax return data for 2021 is available next year. Therefore, it is reasonable to assume that a portion of this $5.4 billion may overstate the amount of overall revenue strength to date.”

The State Controller’s Office posts income tax collections (as well as the amount of refunds issued) on its daily revenue tracker.