6-22-07 State Revenue Shortfall Not As Bad As First Reported

Volume 20 For Publication Date: June 22, 2007 No. 14

State Revenue Shortfall Not As Bad As First Reported

In a letter to the legislative leadership dated June 7, 2007, the Director of Finance noted that state revenue collections for the three major taxes—the personal income tax, the sales tax, and the corporation tax—had fallen below the May 2007 estimate by $526 million, bringing year-to-date revenues just over three-quarters of a billion dollars short of the amount presumed in the May Revision.

Last week, the Department of Finance (DOF) issued a more comprehensive report on state revenues for May. This report shows that revenues from all tax sources for May were
$397 million short and that year-to-date collections were off by $538 million, not the three-quarters of a billion reported one week earlier. The primary differences between the two reports were a stronger showing for the sales tax and a previously unreported gain in the insurance tax. While the Department of Finance Bulletin does not change the fact that the state remains behind its revenue forecast, the recent news is welcome nevertheless.

Perhaps the more important news in the Bulletin is within the discussion of the state’s economic performance. The report notes that the state’s job gains have slowed from 2.1% for the first quarter of 2006 to 1.6% for the first quarter of 2007. More importantly, the state’s unemployment rate climbed to 5.1% in April 2007, up .3% from one month prior. This monthly increase in the unemployment rate was the greatest since November 2001. The DOF, however, expressed skepticism that the state’s labor market has weakened this significantly, anticipating an upward revision in this rate when the final data is compiled in early 2008.

Nevertheless, the report points to other factors that could be signaling a slowing economy. The housing market continues to stagnate, with sales of existing single-family homes off 21% in March from year-ago levels and off 28% in April. In turn, the inventory of homes available for sale has reached its highest level in years.

The good news continues to be the strength of home prices. In light of the slowing home sales volume, home prices are holding steady. In fact, the April median price for a single-family home was $597,600, an increase of 6% from April 2006. The DOF report speculates, however, that this figure could reflect a change in the mix of all home sales, with fewer lower-priced homes selling because of tightening credit markets and the collapse of the subprime lending market. A statewide median sales price could mask the fact that homes of comparable quality and location are indeed selling for less in 2007 than in 2006.

In total, this report could be signaling a significant slowing of California economy and state revenues.

—Robert Miyashiro