A slow-arriving but steady upturn in California’s economy is beginning to translate into higher taxes paid to the state, pushing revenues collected this year more than $2.3 billion above projections made in January.
The new money will erase part of the remaining $15 billion shortfall between what the state expects to spend and what it is likely to receive in tax payments over the next 14 months.
But it is probably too soon to tell whether the infusion of unexpected cash is a sign that the economy is taking off or a merely temporary surge that could disappear as quickly as it arrived.
Although Gov. Jerry Brown will include the latest numbers in a revised budget plan he is scheduled to release May 16, Brown is not expected to retreat from his call for extending about $11 billion in expired or expiring temporary tax increases.
One reason: the governor has mapped a five-year plan for digging the state out of its deep fiscal hole. If he pulls back on that because of a month or two of good news on tax collections, the state could be facing a fresh deficit a year from now.
Legislators reacted quickly to the numbers, with Republicans saying the figures show that more taxes are unnecessary and Democrats contending that extending the temporary taxes must still be part of the solution.
“It’s good news,” said Assemblyman Kevin Jeffries, R-Lake Elsinore. “It shows we’ve hit bottom and are starting to climb back up…It makes it incredibly difficult to make a case for higher taxes.”
But Sen. Juan Vargas, D-San Diego, said that despite the unexpected revenue surge, the state is “not anywhere near out of the woods.”
He added: “This is not the magic bullet at all.”
Republican lawmakers also made it clear that they will put Democrats in a corner by pushing to spend the new money on the schools, undercutting the strategy of Brown and Democratic lawmakers to either threaten or adopt deep cuts in education spending as a way to persuade voters that the tax extensions are necessary.
“Education has to be the highest priority of the state,” said Assemblyman Nathan Fletcher, R-San Diego.
The latest revenue numbers were buoyed by a strong April, the state’s biggest month for tax collections. And the numbers below the surface look even more bullish.
Personal income tax payments in April were 4 percent higher than the Brown Administration had projected when he proposed his budget in January. And while corporate income taxes were below projections, for the year to date personal and corporate taxes combined have been about 5 percent higher than expected.
Because most payments in April are for income and profits earned in 2010, analysts believe the numbers suggest that the economy was stronger last year than originally believed. That would be in line with recently revised employment numbers, which also showed more job growth last year than was reported at the time.
“It just may be that 2010 ended up better than everyone was expecting,” said Jason Sisney, who tracks tax collections for the nonpartisan Legislative Analyst’s office.
Looking forward, two other numbers provide even more evidence that the economy is expanding rapidly. First, withholding from paychecks is up 12 percent so far this fiscal year from the same period a year ago. That’s particularly noteworthy because a temporary increase in the income tax expired on Dec. 31, driving withholding rates down. So any year-over-year growth in that number suggest real, sustained strength in the economy.
The growth in estimated tax payments, which are paid by small business owners, investors and the self-employed, is even more dramatic. Those payments are up nearly 20 percent from the year before.
“The estimated payments in April were the real highlight,” Sisney said. They were likely driven by higher capital gains taxes paid by investors reporting gains in the stock market.
Others noted that California’s technology companies are making a comeback, paying bonuses and hiring more workers. All of that gets translated into higher taxes paid to the state.
“Tech hiring is booming, and I expect many workers got some combination of raises, bonuses, stock options and rising portfolio values,” said Steve Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy.
But Levy said he suspects that the rebound is still fairly narrow. Before counting on any sustained growth in revenues beyond the earlier projections, he said, the state should wait for evidence that other sectors of the economy, and other regions, are doing as well as the Silicon Valley.
“We should wait to see whether and when the tech surge spreads more broadly to other sectors and outside the Bay Area,” he said.