State Gains Unexpected Bonanza in Tax Revenue

State tax collections were $466 million higher than expected in January, the result of Californians trying to take advantage of federal tax law changes, the legislative analyst’s office reported Friday.

The report--and state Finance Director Jesse R. Huff--cautioned that much of the increase could be temporary, created by incentives under the old tax law for high-income taxpayers to pay taxes early.

But if the gain is permanent, the added revenues could ease the money pinch that led to mid-year budget cuts in December and then to Gov. George Deukmejian’s introduction in January of a virtually no-growth $39-billion budget for the coming fiscal year.

Pressure for Rebate

Because the revenues are so much higher than expected, the development could create pressure for a tax rebate at some point many months down the line. That is because Deukmejian said his new budget for the fiscal year beginning July 1 will be only $80 million below the spending limit established in the California Constitution by voters in 1979. The voter-approved initiative said that if the money cannot be spent, it must be returned to taxpayers.

The analyst’s report said tax collections now total $559 million more than Deukmejian Administration revenue estimates made last month. December tax collections ran $93 million higher than expected.

Nearly all of the revenue gains were reported in personal and corporate income tax collections, leading to the conclusion that taxpayers prepaid state taxes in 1986 so they would be eligible for bigger deductions that will no longer be possible under the tax law that took effect Jan. 1.

So it was advantageous for them to prepay such taxes as state income taxes in 1986.

Sales tax collections, the report noted, “were on target.”

Sticks to Estimate

So far, the Deukmejian Administration has stuck to its budget estimates, contending that the revenue windfalls in December and January are a temporary occurrence and represent taxes that Californians would have paid in April, in any case.

Huff, who directs the Department of Finance, said of the increases in December and January: “We think a good portion of these checks represent money just borrowed from April--people prepaying their taxes so that they can deduct them under more favorable rates.”

Huff said he was told that real estate title and escrow companies “did a land-office business in December” as investors rushed to close deals and take profits by the end of the year.

Huff said he wants to watch tax collections over the next couple of months before revising revenue estimates.

Some Gain Permanent

While the analyst’s report conceded that some of the gains were the temporary result of the tax law change, it concluded that at least $200 million of the increase “appears to be permanent” and not just early payment of taxes that would have come later anyway.