Bonds

California revenues are $4.7 billion below forecast for the fiscal year

California revenues for the 2022-23 fiscal year are $4.7 billion below forecast through March.

The updated numbers from the Department of Finance’s monthly cash report arrive just a few weeks before the governor is due to release the “May revise” to his budget proposal.

For the first nine months of fiscal 2023, the state is about 3.7% short of the $126.7 billion in revenues forecast in Gov. Gavin Newsom’s initial budget proposal released in January for fiscal 2024.

Anticipating a $22.5 billion deficit, Newsom had proposed cuts to transportation budgets and shifted some state university projects that were to be paid with cash to bond-funded.

California’s governor usually issues a revised budget proposal in May armed with estimates based off April tax filings, but the state and federal government is allowing residents in the majority of the state’s counties to delay filing taxes until October, which could make revenue forecasting murky.

Revenues for March were only $4 million below forecast with shortfalls in personal income and corporation tax receipts largely offset by strength in sales tax, insurance tax, pooled money interest and other revenues, according to the report.

“Relative to other months, March isn’t a significant revenue month,” said Department of Finance spokesman H.D. Palmer. “The catch-up in processing sales tax finally caught up and brought totals for that revenue source above the month’s forecast – which in turn offset the lower PIT receipts.”

The shortfall for the first three quarters of the fiscal year is largely due to shortfalls in personal income tax receipts, which were $4.4 billion below the forecast of $76.2 billion for the first nine months of the fiscal year, and $828 million below forecast in March, the report said.

The report also looked at income tax withholding to try to forecast revenues. March withholding on personal income taxes was off by $445 million, a 4.5% drop from the same month a year earlier. Withholding also declined in the eight prior months, for an average of negative 5.2%.

“In addition to ongoing weakness, the withholding shortfall in March was likely due in part to a reduction in bonuses, which are usually significant for that month,” the report said. “There were $106 million more refunds than projected in March, and estimated payments, final payments, and other payments were cumulatively down $295 million relative to forecast for the month.”

Though personal income tax receipts are weak as indicated by withholding trends, “gauging the magnitude of the overall shortfall is difficult since payments’ variance relative to the forecast could be overstated or understated since taxpayers’ behavioral response to the delayed tax deadlines may differ from the assumptions made in the governor’s budget,” according to the report.

Corporation tax cash receipts for the first nine months of the fiscal year were $877 million below the forecast of $19.9 billion and were $95 million below forecast in March.

Sales and use tax cash receipts for the first nine months of the fiscal year were $215 million above the forecast of $25.3 billion. March receipts were $696 million above forecast.

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