State Tax Receipts for Two Months Fall $358 Million Below Estimates

The state financial picture, as bad as it was, worsened Monday with the announcement by Gov. Pete Wilson that tax receipts during the last two months were $358 million below the governor’s already-dismal January estimates.

Wilson, in a letter to legislative leaders, warned that if the trend continues “the current fiscal year’s condition could end about $1 billion worse than our January forecast.”

“Although I continue to be optimistic about next year’s revenues, it is now obvious that the deficit will be greater than the $7 billion projected in January,” Wilson said.

A number of state fiscal experts, including nonpartisan budget analyst Elizabeth G. Hill, have pegged the potential budget deficit in this and the coming fiscal year at up to $10 billion. But while Wilson had been indicating that his budget problems could worsen, this was his first official acknowledgement that the shortfall would climb above $7 billion.

Wilson’s bleak assessment was based on an update of actual tax receipts in the treasury.

The department said revenues in February alone were $213 million below budget projections. Analysts, in a written report to Wilson, said the shortfall “is broad-based, extending most significantly to the bank and corporation tax, but also to the personal income tax and sales and use taxes.”

Analysts said that while “there are signs that the recession may be leveling off” and should be helped by the end of the war in the Persian Gulf, “underlying problems such as declining corporate profits, ongoing cost-cutting programs in major firms and the banking industry’s credit crunch will dampen any upturn in the coming months.”

Eroding the state’s tax base were a 7.4% unemployment rate that reflected the loss of 50,000 jobs in the manufacturing and construction industries over the last six months, the lowest level of new home construction since 1982 and lackluster retail sales, the analysts said.

The report said tax collections for the first eight months of the budget year are up--but only by 2.2%, compared to a 6.2% growth rate over the same period last year. Wilson’s budget anticipated revenue growth of just under 5%.

The report supports figures released last week by Controller Gray Davis showing that sales tax receipts and collections of corporate and personal income taxes in February were actually $22 million lower than the amount taken during February, 1990.

The spending gap stems from the fact that even though tax receipts are increasing, revenue collections are not going up fast enough to keep pace with an inflation rate of about 5% and major increases in the costs of providing cells for state prisoners, maintaining welfare benefits and financing soaring public school enrollments. Legal spending requirements are driving up the budget by 11% to 12%, according to estimates by budget analysts.

Wilson in January introduced a budget plan calling for $1.8 billion in tax increases and roughly $5 billion in spending reductions.

In the letter to lawmakers, Wilson urged the Legislature to act on his plan, saying the drop in revenues makes it “more necessary than ever” to move quickly to deal with the deficit problem.

The Republican governor had hoped the Legislature would be further along in acting on two of his proposals--to reduce welfare benefits and to cut $2 billion in financial aid to public schools.

Lawmakers have formed small working groups to come up with alternatives to Wilson’s plan. But, with the financial picture worsening, Wilson said his plan as well as new proposals by the Legislature will be necessary “to put California back on sound financial footing.”