Evidence of Revenue Slowdown Mounting
State General Fund revenues were short $923 million for the month of September 2008, with shortfalls being posted in each of the three major taxes. For the first three months of the fiscal year, revenues are off 4.7%, or just over $1 billion.
The Department of Finance’s (DOF) Finance Bulletin reports that collections from the personal income tax were below the forecast level by 5%, or $289 million. While withholding was essentially on target, posting a gain of $23 million, estimated payments from taxpayers whose income is often derived from nonwage sources, such as capital gains, posted a shortfall of $337 million. In prior economic downturns, shortfalls in capital gains income lead to major shortfalls in personal income tax receipts.
The Finance Bulletin also reported shortfalls in the sales and use tax, off 9.4% or $212 million, and the corporation tax, off 19% or $426 million. Collections from all other sources, when taken together, met the revenue target for September.
The shortfall in each of the three major taxes bodes poorly for the remainder of the fiscal year, suggesting that the economy could slip into a recession. The collapse of the housing market, coupled with the severe troubles in the national credit markets, could lead to a broad-based slowdown. In fact, many economists are suggesting that the nation is already entering a recession. The Finance Bulletin reports that the preliminary Official Statement for the $4 billion revenue anticipation note (RAN) acknowledged a General Fund revenue shortfall of $3 billion for 2008-09, based on September’s weak collections.
The Finance Bulletin also reports continuing weakness in California’s housing and nonresidential construction sectors. Residential permits in August 2008 were down more than 56% from August 2007, and new home permits for the first eight months of this year were off 44% from the same period in 2007. Nonresidential construction, while not collapsing like the residential sector, nevertheless is weaker than year-ago levels, with permitting down 5.5% for the first eight months of 2008 compared to last year.
Cash Reporting—the Finance Bulletin versus the State Controller’s Report
In recent months, the State Controller’s Office (SCO) has issued press releases signaling the shortfall in state revenues. This information may be at odds with figures reported by the DOF. In the September Finance Bulletin, the DOF addresses this issue by noting that it reports on “agency cash”—the revenue receipts reported by the state’s tax collection agencies. The DOF explains:
“Actual General Fund revenue receipts as posted by the State Controller's Office is generally different from the results from the agency cash revenue receipts due to timing. This is due to lags between the time tax agencies record tax payments and refunds, and the time these amounts are reported to and recorded by the State Controller's Office accounts. For the month of September, the loss in the major three revenue sources is $927 million under agency cash basis and $814 million per the State Controller's Office accounts—a difference of $113 million.”
Ultimately there is a full accounting of these discrepancies, and the two agencies reconcile their books. However, we have consistently reported the DOF’s figures because they are more accurate for any given point in time, and, also because the Governor’s Budget is developed based on the revenue estimates and forecasts of the DOF, not the SCO.
—Robert Miyashiro