Tax Season Leaves State Even Shorter

A combination of weak personal income tax receipts and a jump in refund claims is setting the stage for California to face an even bigger budget shortfall than previously anticipated.

Personal income and corporate tax receipts for the first three weeks of April were running about 15%, or $470 million, below last year. Personal income tax refunds, meanwhile, were up 13%, or about $135 million.

The news grew grimmer Monday when the state counted $1.2billion in personal income tax receipts, compared with $3.5billion on the same Monday last year.

“The daily totals are way below both last year’s level and the budget estimates for the month,” said Brad Williams, senior economist with the state’s nonpartisan legislative analyst’s office. “Things can change; we’ve had surprises before, but clearly there’s going to be a major shortfall.”

Williams attributed a mail glitch for contributing to the unusually high $3.5-billion figure last year. The glitch aside, Williams said if the pattern continues to hold, he expects the state to take in about $5billion in personal income taxes in April, compared with the $6.7billion his office forecast for the month.

The weak revenues could cause the state’s projected $17.5-billion budget shortfall to grow by an additional $1.7billion. So far, state officials have addressed about $4.3billion of the problem through cuts, budget changes and by refinancing the state’s debt.

Williams said the jump in refund claims is tied to weak tax receipts. Californians, he said, were making estimated tax payments on bonuses and raises that failed to materialize.

“People with investments in the stock market don’t have anywhere near the capital gains they’ve had in prior years,” Williams said. “People that receive stock options have seen the value of those options decline a great deal over the last year.... Many of the stock options are now underwater.”

The gloomy revenue picture comes as the Davis administration prepares to release its revised budget on May 14. The spending plan the administration released in January counted on the state taking in $8billion in personal income taxes in April and pegged the shortfall at about $12billion.

The state will receive another key piece of financial information today when the federal government releases personal income data that will help determine how much the state owes schools under Proposition 98, the complex funding formula that dedicates about 35% of the general fund to kindergarten through community college education.

The analyst’s office predicts schools are owed about $1 billion more than the Davis administration estimates.

State Sen. Steve Peace, the El Cajon Democrat who chairs the Senate Budget Committee, said the recent tax data suggests that at best the state is headed toward a high budget shortfall in the neighborhood of the $17.5 billion previously forecast by the analyst’s office.

“We’ll have to cut more and borrow more,” Peace said. “My personal position is that we should borrow everything the market will allow us to borrow as long as we can get competitive interest rates and terms.”

Peace does not believe the state will need to raise taxes to close the budget gap but he said he remains concerned about a possible cash-flow problem.

“What was a very difficult problem is now a very, very difficult problem,” added Assemblyman John Campbell, the Irvine Republican who handles budget matters for his caucus.