4-27-07 Revenues Are Short As May Revise Approaches

Volume 20 For Publication Date: April 27, 2007 No. 10

Revenues Are Short As May Revise Approaches

April is a pivotal month for state revenue forecasters. Personal income taxes for the prior calendar year are due in April, and the amount collected forms the basis for finalizing 2006-07 revenues and projecting revenues for 2007-08. The Department of Finance has a forecast of daily collections against which the actual collections are measured. In April, it is not uncommon for collections to swing by more than $200 million in a single day, either above or below the forecasted level.

Going into this critical month, the state must make up ground if the May Revise is to be as good as or better than the revenue projections contained in the January Governor’s Budget Proposal. Net revenue collections are roughly $1.3 billion below the expected level through March, with the greatest weakness found in the personal income tax. The sales tax is meeting projected levels and the corporation tax is almost $400 million above expectation.

The personal income tax through March is running $1.652 billion short. While withholdings—taxes on wage and salary income—are generally on target, estimated payments are falling short. Estimated payments reflect taxes due on income from capital gains and other nonwage/nonsalary activity. Forecasters acknowledge that it is becoming increasingly difficult to project how much revenue will be collected from this source because it is highly dependent upon taxpayer behavior (i.e., when capital gains are taken and how much), especially those whose incomes exceed a million dollars and account for a disproportionate share of the personal income tax.

If April collections do not make up most—or all—of the shortfall to date, we can expect the Administration to project lower revenues for the May Revise than in the January Budget Proposal. This, in turn, would likely force additional General Fund expenditure reductions or other unwelcome budget actions.

We will report on the April collections as soon as information becomes available.

—Robert Miyashiro