Extra Cash Flowing Into State Coffers

State finance officials reported Wednesday that revenues are more than $1.2 billion over projections just three months into the fiscal year, the result of a surprise spike in tax receipts that may help erase California’s ongoing budget shortfall.

Budget analysts on Wednesday were furiously trying to pinpoint why so much extra money came into the state -- and whether it is a trend that could be expected to continue.

Most of the extra cash was collected in September, when many businesses and individuals filed their quarterly returns. Personal income taxes and corporate taxes unexpectedly shot up. Consequently, the state took in $897 million more than anticipated last month -- 10% above projections.

The cash will go into the state’s budget reserve, which can be tapped only to cover unexpected expenses from programs already authorized in the budget, or to cover costs if the state loses a major lawsuit. Otherwise, the reserve will remain locked until next year, when it can be used to help close a projected $6-billion budget shortfall.

“This is good news,” said Department of Finance spokesman H.D. Palmer. “But we don’t want to make the mistake of assuming this will continue month after month.... One good month doesn’t necessarily guarantee these trends will continue.”

It is not uncommon for cash forecasts to be wildly off. State government is highly dependent on personal income taxes, and slight changes in the economy can lead to substantial shifts in how much money they generate.

So far this year, personal income taxes are $666 million above estimates.

State forecasters say that money is not coming from salaries. It is probably the result of increased capital gains, which could include stock market profits and earnings from real estate investments.

There is also the new tax on high earners that voters approved. Department of Finance officials say the 1% surcharge on every dollar earned over $1 million may be generating more cash than anticipated. That money goes to a fund to pay for mental health services. Voters approved the tax through Proposition 63 in November 2004.

The other area where an unexpected spike occurred is corporate taxes, up $524 million. According to the Department of Finance, the increase may be attributable to a 2004 federal law that gives companies a break for bringing overseas profits back into the United States.

Businesses typically keep such profits out of the U.S. to avoid federal tax of as much as 25%. The American Jobs Creation Act of 2004 lowered that federal tax rate to 5.25% for one year to encourage businesses to “repatriate” the money. The move is intended to give those companies an incentive to invest foreign profits back into their U.S. operations. California is getting a boost as companies must pay state taxes on those profits that, until now, had been kept overseas.

While all the extra revenues should make it easier for lawmakers to deal with the budget shortfall next year, the money is doing little to quell anxiety in the Capitol over where California’s economy is headed.

Assembly Budget Committee Chairman John Laird (D-Santa Cruz) said most of the extra taxes are from profits earned before Hurricane Katrina destroyed much of New Orleans and surrounding areas, and before gas prices soared. And then there is the concern that California’s economy is overly reliant on a housing bubble that is beginning to deflate.

“There are a number of outstanding issues to worry about,” Laird said. “We’re hoping these numbers reflect the middle of an economic uptick. But they could reflect the outer edge of an economic uptick.”