The State’s Rising Dough

Scott Lay
Publisher of The Nooner

The Legislative Analyst’s Office released its look at February revenues yesterday, and found quite a bit more in the piggy-bank than expected. “In total, the preliminary tax agency data indicates that overall PIT collections for February 2014 (all funds) were $2.07 billion, orabout $700 million (52 percent) above the administration’s projections. For the 2013-14 fiscal year to date, this would mean that PIT collections are beating the administration’s January budget projections by about $650 million (1.7 percent).”

Here is the chart of 2013-14 cash flow at January proposal, which projected personal income tax revenue at $64.287 billion, which accounts for 64.2% of the state’s anticipated revenue. This revenue projection for the “current year” was increased in the “budget year” (2014-15) proposed budget released in January by $3.46 billion. The LAO’s November forecast pegged PIT at $66.002 billion, or $1.715 billion above the governor’s budget (plus an additional $200m in sales and corporate taxes). To achieve this, personal income tax revenues need to be 3.3% above the Governor’s January projections in the last four months of the year.

February is the lowest month for state personal income tax collections, but the surprising upside on revenues certainly is raising eyebrows. April will be the behemoth month that will make or break the budgetary projections. However, to “bank” some above-budget revenues to allow for some downside volatility in our biggest tax month puts smiles on the faces of budget-writers.

The stock market is certainly outperforming LAO projections. The LAO projected it would average 1,780 for calendar year 2014, while it is actually at 1,870–above the 2015 projected average. Of course, downside volatility of 5% is certainly possible, although upside revenues are generated more quickly than downside losses are realized (buy low, sell high).

In short, the revenues identified in the Governor’s Proposed Budget are almost certainly on target, and there is a much higher likelihood of an upside change at May Revise than a downside.

Further, for the home gamers, we are talking about the current year. In an improving economy, this “amplifies” the revenue projections. If the LAO’s projections come true, it doesn’t mean that the state has $1.715 billion more to spend. Rather, that is added to the piggy bank but also adjusts the “base” budget for the “budget year” (2014-15). In a flat economy, that could mean $3.4 billion more to spend ($1.715 in the current year and a similar amount in the budget year). In a growing economy, it would be more, and in a shrinking economy, it would be less.

If I were asked to give a range of May Revise additional Big 3 (personal income, sales, and corporate tax) revenues as of right now (and nobody’s asking), they would be:

  • Low-range: Current year (one-time): $1.2b; Budget-year (ongoing): $1.26b
  • Mid-range: Current year (one-time): $1.7b; Budget-year (ongoing): $1.85b
  • High-range: Current year (one-time): $2.2b; Budget-year (ongoing): $2.31b

We’ll see how I do in mid-May. I have no inside knowledge to what LAO or DOF are thinking, but have been doing these ranges for a long time for my day job.

Finally, it is likely that a large share of any of these scenarios would be owed to K-14 schools under Proposition 98.

The report comes amidst LAO Mac Taylor‘s goal of releasing analysis much more frequently, and comes from deputy Jason Sisney‘s economic unit. For those of you that have been around awhile, you remember the absolute secrecy most Capitol watchers used to encounter between the January/February governor’s budget and analysis cycle and the May revise. Both in the policy and economic analysis arenas, we now get a steady stream of materials to chew on. Kudos, Team LAO!

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