Preliminary September Revenues Up Sharply

Although the Department of Finance (DOF) has not yet released its monthly Finance Bulletin for October, Brad Williams, the Legislative Analyst’s chief economist, has acknowledged that revenues from two of the three major taxes are up significantly. The corporation tax came in $525 million above the May Revision estimate and the personal income tax (PIT) exceeded the estimate by $380 million, for a total gain of $905 million. No information is available at this time for the sales tax and the other minor taxes.While some have speculated that the corporation tax gain is related to rebuilding contracts tied to the hurricane-damaged Gulf Coast region, Williams rejects this theory because taxable profits from such activity would not materialize this soon. Instead, he believes that the gain could be a result of corporations taking advantage of a reduced federal tax rate on earnings generated in foreign countries. Federal law allows foreign earnings to be “repatriated” to the United States and thus subject to domestic tax rates, which in turn would generate greater tax revenues for California and other states. In addition, Williams believes that the high profits enjoyed by oil companies could be contributing to the corporation tax gain.

While the official DOF’s account of revenues will not be available until later in the month, this news is certainly welcome. Even if the other taxes just meet expectations, the collections from the corporation tax and the PIT will place the monthly take about 10% above estimate. Combined with collections from prior months, the September revenues would place the state almost $1.8 billion ahead of projections, which would ease the types of cuts and program reductions many Capitol observers anticipate will be part of the January Governor’s Budget. Read the rest of this entry »

Legislative Analyst Identifies $6 Billion Budget Gap

In a report on the current year state spending plan, the Legislative Analyst’s Office (LAO) identified a $6 billion gap between revenues and expenditures for 2006-07. While the Legislature and the Governor made progress in reducing the structural budget gap with the 2005 Budget Act, ultimately the state spending plan continues a four-year practice of deficit spending.In the report titled California Spending Plan 2005-06, the LAO acknowledges that the budget gap has been reduced from about $9 billion to $6 billion, largely because of stronger revenue collections in 2004-05 and $2 billion in cuts contained in the budget. Nevertheless, the operating shortfall is far from being eliminated. One of the principal reasons for the persistence of the shortfall is the state’s reliance on one-time solutions to bridge the budget gap, which emerged in 2001-02 following the collapse of technology stocks.

In the report, he LAO identified $5.9 billion in 2005-06 budget solutions. These included program savings of $4.1 billion (of which the broken agreement on Proposition 98 accounted for $3 billion), funding shifts of almost $730 million, loans and borrowing totaling about $900 million, and revenues from tax compliance of just under $100 million.

It is important to note that the LAO, in identifying the actions taken to produce a State Budget for 2005-06, acknowledges that the amount owed to K-14 education under Proposition 98 should have increased with the growth in General Fund revenues. Thus, the nonpartisan Analyst counts as part of the budget solution the failure of the state to provide $3 billion in additional funds.

The LAO also identifies $2.9 billion in outstanding debts owed to K-12 schools as a result of payment deferrals imposed over the last four years. Referring to these amounts as “credit card” debts, the LAO acknowledges $1.1 billion in revenue limit and categorical deferrals, almost $1.5 billion in mandate deferrals, and $290 million in ongoing unfunded costs for the revenue limit deficit factor. The LAO report can be viewed on line at www.lao.ca.gov. Read the rest of this entry »