Strong March Revenues Point to Hopeful May Revision While Other Signs Suggest Caution
General Fund revenue collections for March were $905 million above estimates, an unexpected gain of almost 18% over the budgeted level. Of the three major taxes, both the personal income tax and the corporation tax showed significant strength, while the sales and use tax brought in just what was expected.
Revenues Are Higher—In the Short Term
In its April bulletin, the Department of Finance (DOF) reported that March revenues, combined with collections from the three prior months since the January Governor’s Budget forecast was developed, bring year-to-date revenues $1,049 million above expectation, or 1.7%. Of this total, the personal income tax accounts for $614 million and the corporation tax provides $473 million, while the net yield from the other taxes has fallen short of projections by $38 million. It is important to note that these collections are measured against the revised current-year forecast contained in the January Budget, which increased the outlook for 2005-06 revenues by $3.2 billion from the 2005 Budget Act that was adopted last summer. In other words, it is the high forecast that is now being exceeded.
The final weeks of April are a critical period for determining total current-year revenues, with roughly $12.5 billion expected for the month, and also for setting the stage for the May Revision forecast for 2006-07. Strong April collections often form the basis for an upward revision to the forecast for the upcoming fiscal year.
Long-Term Economic Softness
This year’s May Revision, however, may prove particularly tricky. While the state is seeing strength in its current-year receipts, there are signs that the state economy is slowing. UCLA, in its March 2006 forecast, revised its outlook for personal income growth down for both 2005 and 2006, citing growing weakness in the state’s housing market. For 2007, UCLA forecasts personal income growth of 4.7% compared to 5.5% assumed in the January Governor’s Budget. Appearing to confirm UCLA’s more tempered outlook, the DOF’s April bulletin notes that home sales were down 15.5% for February 2006 compared to one year ago and that skyrocketing home prices may have plateaued, with the median price of an existing home hovering in the $535,000 to $550,000 range since June 2005.
Energy Is Still the Wild Card
Another factor that could dampen state economic growth in 2006-07 is energy. Uncertain conditions in the Middle East and the continuing problems in Iraq could raise oil prices in the next 12 months. Along these lines, energy analysts are predicting that gasoline prices could exceed $3.00 per gallon this summer.
The May Revision, scheduled to be released one month from now, will reveal how much weight the Administration places on these economic developments in light of the strong cash performance of the General Fund this year.
