California is poised to fall well short of its budget forecasts as the recent stock market slump erodes the state’s tax revenue.
As of Oct. 25, a total of nearly $18 billion was collected so far this month — significantly lower than the $42 billion of collections that were previously projected for all of October — according to an update from the state’s Department of Finance late Friday. The shortfall comes as the state prepares to close out its seasonal autumn sale period for state-issued municipal bonds.
It’s unclear how the budget outlook will impact the state’s bond sales, according to H.D. Palmer, deputy director for external affairs for the California DOF. The state has “never missed a schedule bond payment to a note holder,” he said in an interview Monday.
The state expected to receive $28 billion from personal income taxes and $14 billion from corporate taxes in October, but, income taxes have thus far yielded only $11.8 billion while corporate taxes have produced $6.2 billion through Oct. 25.
The new assessment of tax revenues reveals that cash receipts for fiscal year 2022-23 will likely be significantly below the $198 billion the state forecasted in May 2023 for its top three tax revenue sources — personal income taxes, corporate and sales taxes.
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The state’s collections — which are highly dependent on capital gains and personal income tax revenue — were suppressed by stock market weakness and slowing wage growth. Nearly half of California’s income tax collections come from residents in the top 1% of income earnings.
California should still have breathing room because its Budgetary Stabilization Fund gives it ample flexibility if collections fall short. The state has a total of $37.8 billion in total budgetary reserves, according to bond documents.
However, there are concerns that the forecasted budget deficit of at least $14 billion that California is projected to face in the next budget cycle could grow larger, forcing the state into a combination of painful budget cuts and rainy-day fund withdrawals.
The state’s outlook has been complicated by a seven-month extension on its income tax filing deadline that was granted to those affected by severe winter storms this year. A complete accounting of California’s revenue collections will not likely be available until November due to the delays.
California usually refrains from publishing daily or weekly snapshots of a given month’s revenue status until that month has ended and all general fund revenue receipts are totaled but, an early release was necessary this month because the state has two bond sales closing on Nov. 8 and the tax filing delay has pushed back the release of critical revenue data.
Palmer said it is “certainly possible” that the $14 billion budget deficit California is projected to face in the next budget cycle could grow larger.
“We still have several more days,” said Palmer. But “most folks, it’s fair to say, filed their taxes.”