California’s Tax Collections in May Far Exceeded Expectations

California Gov. Gavin Newsom announces the state’s revised budget in Sacramento on May 10, 2024. Office of California Gov. Gavin Newsom

With California facing a significant budget deficit due to corporate and personal income tax collections failing to meet expectations over the past year, a report released June 5 by the nonpartisan Legislative Analyst’s Office found that revenues collected in May were higher than anticipated.

Analysts note that such “unambiguously strong” receipts follow steep declines in personal income tax collections during the second half of 2022 and first part of 2023. Improvements in withholding are attributed to stock price increases that began in mid-2023, according to the analysts.

In a separate report from November 2023, the analyst’s office explained how higher stock prices, especially pertaining to tech companies, affect income tax withholding—because many tech companies in California offer “equity pay” structures that result in more stock options given to employees. Such pay is also subject to withholding taxes.

The Legislative Analyst’s Office report, however, also acknowledged that some of the gains are a result of timing issues.

“The monthly cash total did benefit from some tailwinds related to ... a few extra major collection days,” analysts wrote in the report. “These tailwinds likely account for about half of the increase above prior year levels.”

May data show an acceleration of withholding in the final eight collection days of the month, when the state brought in about $3.5 billion—nearly $1 billion more than in the last eight days of May 2023.

Jason Sisney, budget advisor to Assembly Speaker Robert Rivas, wrote in a June 5 Substack post that June 17 will be a telling date.

June 17 is the deadline for second quarter estimated tax payments, and it’s also when a tax filing extension for San Diego County flood victims expires.

“Collections that week could show whether some of the May windfall was due to... money previously assumed to be paid to the state treasury in June, but which ‘showed up early’ in May,” wrote Mr. Sisney.

Some skeptical of the May revenue increase expressed concern that future months might fall flat of expectations.

“One month does not equal a trend,” one critic posted June 5 on X after the analyst’s report was released.

April collections failed to meet forecasts by about $6.5 billion, including personal income, corporate, and sales taxes.

A report released May 2 by the analyst’s office highlighted a difference of about $19 billion between analysts’ and the governor’s revenue forecasts across the 2022-2023 through 2024-2025 fiscal years.

“Our forecast continues to suggest there is significant downside risk to state revenues relative to the governor’s budget,” analysts wrote. “That being said, there is still significant uncertainty about how much revenue the state ultimately will collect.”

The uncertainty has also led to stark discrepancies in the depth of the state’s deficit. The analyst’s office estimated the shortfall at about $73 billion, while the governor said the amount is closer to $45 billion.

“Our numbers suggest something radically different,” Mr. Newsom said during his May 10 press conference in response to a question from The Epoch Times. “They will have, and they continue to have, their point of view, and we respect them and have a great working relationship.”

In the governor’s budget summary released in May, he said California’s economic future is bright, despite “persistent inflation and elevated interest rates.”

If revenues continue to outpace forecasts, the state’s budget deficit could improve slightly, though it is unclear how May’s collections will impact the fiscal situation.

Budget discussions were in full swing at the Capitol ahead of a deadline of June 15 for the Legislature to pass a budget plan, and the governor’s approval is required by July 1, the first day of the next fiscal year.