The easy days of California budget surpluses are long gone with tax revenue plummeting in the new coronavirus recession.
But as bad as the outlook stands, tax collections across the board so far are coming in a little better than Gov. Gavin Newsom projected in the $203 billion state budget he signed last month.
The figures suggest to economists that high-earning workers are still employed and that the financial assistance Congress provided at the start of the outbreak in March helped Californians buy necessities.
They see evidence of those trends in better-than-expected revenue from income tax withheld in paychecks and rising sales tax from online purchases. Altogether, the state had about $1 billion more than it expected on hand at the end of June.
But even with modest improvements on Newsom’s original forecasts, Department of Finance spokesman H.D. Palmer said California faces more difficult financial decisions.
The trends could worsen if the state’s high unemployment rate persists or climbs. A new report released Thursday by the U.S. Bureau of Economic Analysis showing that the nation’s gross domestic product shrank by 9.5% from April to June underscored the uncertainty ahead
“California’s economy remains severely depressed,” the Legislative Analyst’s Office wrote in an economic update last week. “The state has a long way to go to return to its pre-pandemic economy. On top of that, the recovery appears to be extremely fragile and could reverse quickly with the recent increase in COVID-19 cases.”
Newsom last month signed a budget that that cut pay for state workers, slashed spending on universities and deferred planned spending on public schools. The administration anticipates another $8.7 billion deficit next year.
“The takeaway should not be that we’re going to have a much easier time going forward — because we’re not,” Palmer said. “Even if things break perfectly for us, we’re still going to look at having to come up with another $8.7 billion [and] there’s still a lot of uncertainty in terms of how much the state’s going to have to spend in terms of its response to the COVID-19 pandemic.”.
High-earners kept jobs
Recent tax revenue reports, officials and economists say, indicate that California’s wealthiest have weathered the economic storm relatively well.
Personal income and corporate taxes collected between April 1 and July 23 outperformed predictions by 12 percent, or $2.7 billion, according to the Legislative Analyst’s Office. Collection totals are about 9% — or $2.5 billion — behind the 2019 pace.
Department of Finance officials attribute the overall strength of the personal income tax to withholding from wages.
Withholding revenue — the amount of money that employers send directly to the government rather than including those dollars in employees’ paychecks — exceeded expectations by $1 billion in June, according to a revenue breakdown in the department’s monthly report.
Given that unemployment statistics have largely tracked May predictions, officials say June’s withholding numbers may indicate that a greater-than-usual proportion of contributions came from higher-income wage earners who can work from home.
That’s true of personal income taxes as a whole, said UCLA economist Jerry Nickelsburg.
Given California’s progressive income tax system, those in lower tax brackets — like workers in leisure and hospitality, retail and personal services, who have suffered disproportionately in the economic downturn — contribute less to overall revenues than do higher earners. California’s wealthiest 1 percent of households often pay about half of the state’s total income tax.
As a result, Nickelsburg said, you wouldn’t expect revenues to decline in proportion to the number of overall workers who lost their jobs.
He added that the technology industry will likely lead the way out of the recession in California, which bodes well for personal income taxes. Many tech companies — which offer high incomes — have grown in recent months, Nickelsburg said.
While California may set itself apart with tech, its recession experience mirrors the country’s in another area: sales tax receipts.
The economic crisis — driven by rising COVID-19 cases, stay-at-home orders and business closures, according to the Urban-Brookings Tax Policy Center — has resulted in a 21% nationwide decline in sales tax revenues through May as compared to 2019. In California, that number is 20.1% according to data provided by the Department of Finance.
Still, that’s an improvement on May predictions, which forecast a 28.8% decline.
One major factor, Nickelsburg said, is Internet sales: A jump in online purchases likely mitigated the state’s overall decline in sales tax revenues.
That uptick began months ago. In the first quarter of 2020, tax from online sales increased by nearly 36% compared to 2019, according to the California Department of Tax and Fee Administration.
The surge followed a recently enacted state law, the Marketplace Facilitator Act, requiring giant online retailers like Amazon to collect California sales tax on behalf of smaller companies that sell products on their platforms.
Amazon in 2018, reported to the SEC that 58 percent of sales on the website were by made so-called third-party retailers. Previously, some of those so-called third-party retailers did not collect tax on sales to California residents. Those sales now are taxed.
Data from the tax department also shows increased spending at grocery stores, home improvement stores and big box retailers, reflecting Californians’ spending priorities at the beginning of the outbreak.
Whether sales and personal income tax trends continue may depend on whether the 4 million Californians currently on unemployment keep receiving increased benefits, officials say.
The federal government has doled out an additional $600 a week since late March, but those checks stopped coming on July 25. It’s unclear when — or if — a portion of that payment will return.