California Is Either Recovering or Imploding. We're Not Quite Sure Yet.

Income tax revenues for January exceed expectations. That may not be good news.


This eventually led to ghost towns. Just pointing that out.

See! I keep saying that California does a terrible job projecting revenues and expenses and that we shouldn't tie the state's recovery to predictions that may prove to be completely wrong. Here's the latest from the state's Legislative Analyst's Office:

As of today, January 31, the state has collected a net amount of $12.775 billion of [personal income tax] for the General Fund and the Mental Health Services Fund (all funds). This exceeds DOF's projection for the entire month–as released in the January 10 2013-14 Governor's Budget–by $5.01 billion.

Oh, uh, $5 billion more than projected. Well, then. If I were Jon Stewart, this would be the point where I would be sheepishly shuffling around papers on my desk and trying to look adorably chastened.

However, the surprise cash infusion may not be good news.  The LAO analyzes three possible explanations for the unexpected growth in tax revenue, and two of them actually aren't positives:

More Revenue Now…Less In the Next Fiscal Year. Given the higher federal tax rates that were part of the federal "fiscal cliff," both our office and the administration have long projected that some taxpayers (particularly high-income individuals and families) would "accelerate" a portion of their future capital gains, wage, dividend, and other income from 2013 to 2012 in order to take advantage of lower federal tax rates. It is likely that a substantial portion of the January boost in PIT collections results from these accelerations being greater than expected. To the extent this is true, higher collections in January 2013 will tend to result in lower-than-projected collections in later months, particularly between now and April 2014. In other words, the higher revenue for 2012-13 (part of which will be "accrued," or attributed, back to 2011-12) could contribute to lower-than-projected revenues for 2013-14.

  More Revenue Now…Less Between Now and April 2013. High-income Californians will pay higher taxes retroactively back to the beginning of 2012 under Proposition 30, which was approved by voters in November. It is possible that some of these taxpayers are "settling up" via estimated payments now, rather than April, when most such settling up activity was projected to occur.

  More Revenue…Period. Given the magnitude of the January revenue boost, it is also likely that a portion of it is attributable to 2012 taxable income simply being greater than previously projected (separate and apart from any higher level of accelerations). Generally favorable stock market trends in recent months could be contributing to this. In addition, various California-specific taxable income trends, such as capital gains income related to the state's technology industries, could be a factor. Higher-than-projected PIT payments related to Facebook's initial public offering also may be playing a role. (As we have noted previously, the state's prior revenue projections–lowered significantly in the administration's January 10 revenue estimates–have largely omitted Facebook-related PIT payments connected to discretionary stock trading activity by the company's early investors and employees.)

It's possible that all three explanations are true to some degree. Following some bad income tax projections last spring, California has consistently been showing growth in income tax revenue. However, sales tax and corporate tax revenues have been pretty flat or declining. The economy may be recovering for many Californians, but they aren't rushing out to spend. The LAO warns that the unexpected high revenues should not be taken as a sign that the state's bottom line has improved.

We'll probably know by May whether the burst in revenue was a going away present from California's wealthiest or if it's the real deal. I don't expect California's leaders to show the same restraint.

NEXT: Steven Greenhut on Progressive Failure in California

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  1. It doesn’t matter. The overall liabilities are beyond any chance of being balanced by revenues. Paying the minimum on your credit card just leaves you with more to pay next month, it doesn’t mean you’ve ‘balanced’ your budget.
    See for example: “School districts pay dearly for bonds”
    “By 2049, when the debt is paid, it will have cost taxpayers $154 million – seven times the amount borrowed.”…..237868.php
    And no one is yet even whispering about the retirement benes.

  2. Hey, as long as those dollars are out of the hands of irresponsible taxpayers and in the hands of state officials, however it happened it’s great for the Incan economy.

  3. So when they take this as “it will always continue up and up!” and spend the living #$%& out of every dime they can find, and this ends up popping they will all be standing around with “who farted” look on their collective faces and then say ” clearly the only solution is moar taxez”!

    1. In a recession the government needs to spend more for stimulus; in an expansion the government needs to spend more because we can afford it. What could go wrong?

  4. “Well, then. If I were Jon Stewart, this would be the point where I would be sheepishly shuffling around papers on my desk and trying to look adorably chastened.”


  5. They’ll take option 3, and spend the increased revenue on some ultra long term disaster like high speed rail, that will only make the budget worse in the long term, and look all shocked and try to find a way to raise taxes again when it turns out to have been option 2.

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