No new taxes – at least none proposed by the Governor last Friday. Kudos to him and his team for recognizing the damaging effect that more taxes would have on the hoped-for economic recovery. Businesses and individuals are paying tens of billions in higher and more aggressively collected taxes enacted during the past two years.

But additional taxes remain on the table as the politicos and interest groups clear their throats. Legislative Democrats have lined up a parade of tax increases to keep pressure on budget negotiators. And even the Governor is counting indirectly on a tax increase for nearly nine hundred million dollars of his budget solution. The state receives a small portion of the federal inheritance tax, and unless Congress takes action to reduce or repeal it, the federal “death tax” will be reinstated come 2011.

The Governor has also become slightly more optimistic since January about the economic recovery. The May Revision estimates that California personal income will jump by 3.2% this year and 4.5% in 2011, which is a 33% improvement in the rate of growth for 2010 and a 25% improvement in the rate of growth for 2011. He also sees slightly better performance in housing starts, although he has become more pessimistic in job recovery – with unemployment remaining near 12% through the end of his term and not dropping below 10 percent in 2011.

The slightly more robust growth in personal income must explain why the Governor maintained confidence that personal income tax collections will come in at over $46 billion in 2010-11. Income taxes account for just over half of General Fund revenues. In January, he estimated virtually flat growth in income tax revenues between this fiscal year and next – $46 billion for each year. However, the “April surprise,” which saw income tax collections fall more than $3 billion short of forecast, dropped this year’s estimates to $44 billion, yet the Governor expects next year’s collections to increase by about $2.2 billion.

In addition to generally better performance of the California economy, the Governor believes that the personal income tax will be bolstered by higher capital gains from a higher stock market, as well as taxpayers shifting gains from to 2010 from 2011 when federal preferential rates are due to sunset – another example where a federal tax increase will putatively benefit the state budget.