Revenue Volatility and Californias State Budget May 1, 2009 May 1, - - PowerPoint PPT Presentation

Revenue Volatility and California’s State Budget

May 1, 2009 May 1, 2009 Phil Spilberg

Chief, Financial Research California Department of Finance

Outline

• Overview of CA Revenues
• Revenue Shortfalls and Solutions
• Major Revenue Provisions Enacted in

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• Major Revenue Provisions Enacted in

2008 and 2009

• Commission on the 21st Century

Economy (COTCE)

Overview of California Revenues

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Revenues

General Fund Variability General Fund Variability

$6,961 1.02 1.66 1.10% 1.40% 1.70% $5,000 $6,000 $7,000 $8,000

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$249 $940 $1,828 $2,263 $4,191 $217 $700 $1,369 $2,311 0.87 0.70 0.75 1.02

• 0.10%

0.20% 0.50% 0.80% $0 $1,000 $2,000 $3,000 $4,000 $5,000 1959-1968 1969-1978 1979-1988 1989-1998 1999-2008 Average Growth Rate Standard Deviation Coefficient of Variation

2009 2009-10 General Fund Expenditures 10 General Fund Expenditures

(Dollars in Millions) (Dollars in Millions)

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California State and Local Own California State and Local Own Source Revenues 2005 Source Revenues 2005-06 06

(Dollars in billions) (Dollars in billions)

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State $134.8 57% Local $101.9 43%

General Fund and Special Fund Revenues General Fund and Special Fund Revenues Share of Total 2007 Share of Total 2007-08 State Tax 08 State Tax Collections Collections

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$95,343, 85% $16,438, 15%

General Fund Special Funds

General Fund Revenue Sources General Fund Revenue Sources 2007 2007-08 08

Corportion tax 12% Other 6%

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Personal income tax 55% Sales tax 27%

California State Revenues by Source California State Revenues by Source

($ Billions) ($ Billions)

11.3% 12.7% 16.8% 18.1% 28.2% 32.8% 35.4% 40.7% 44.6% 45.3% 57.5% 53.4% 53.4% 50% 60% 70% 80% 90% 100%

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59.4% 56.1% 44.5% 43.7% 40.3% 39.5% 37.4% 36.3% 35.2% 34.2% 27.4% 29.5% 26.3% 16.8% 18.1% 28.2% 53.4% 0% 10% 20% 30% 40% 50% 1950-51 1955-60 1960-61 1965-66 1970-71 1975-76 1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2007-08 Retail Sales and Use Tax Personal Income Tax Corporation Tax Estate Tax Other

Where Do We Rank? Where Do We Rank?

2006 Own Source Revenue Tax Collections % Personal Income Rank % Personal Income Rank Louisiana 21.0% 3 14.0% 6 New York 21.0% 4 15.7% 2 New Mexico 20.9% 5 12.9% 9 Indiana 19.8% 6 11.9% 17 Utah 18.9% 12 11.8% 19 South Carolina 18.3% 14 10.3% 44 Oregon 17.6% 17 10.8% 40 California 17.6% 18 12.1% 14 Ohio 17.2% 22 11.8% 18

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Ohio 17.2% 22 11.8% 18 Minnesota 16.9% 26 11.8% 20 Washington 16.6% 27 11.2% 29 Michigan 16.4% 33 10.9% 38 New Jersey 16.3% 34 12.5% 10 Florida 16.2% 35 10.8% 41 Pennsylvania 16.1% 36 11.4% 26 Nevada 15.7% 38 10.8% 39 Illinois 15.4% 41 11.2% 28 Arizona 15.3% 43 11.0% 34 Massachusetts 15.2% 44 10.9% 36 Texas 15.0% 45 10.0% 46 Maryland 14.6% 48 11.1% 31 U.S. Average 16.9% 11.6% Source: U.S. Bureau of the Census and Bureau of Economic Analysis

Revenues are More Volatile Than Revenues are More Volatile Than the Economy the Economy

15.0% 20.0% 25.0% 30.0%

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• 20.0%
• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 1970 1975 1980 1985 1990 1995 2000 2005 Personal Income Revenues

Revenue Shortfalls and Solutions

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Solutions

Budget Cycle

• January

 Governor’s budget for upcoming fiscal year (July –

June)

• May

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• May

 May Revise

• June

 Budget Act  Some years it’s late

 In 2008, September  In 2009, February, but later in my presentation, the rest of

the story

2008 May Revise

• 2008-09 Budget had identified a structural

imbalance

• By May Revise the economy started to

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• By May Revise the economy started to

slow down and the revenue forecast was revised down by $6 billion

• May Revise projected a budget gap of

$24.3 billion

2008-09 Budget Act

• Enacted September 2008
• Included $23.9 billion budget solutions

 Revenue related – $12.6 billion

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 Revenue related – $12.6 billion  Spending related – $11.4 billion  End of year reserve – $1.7 billion

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(+20.3%)

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(-17.2%)

2009-10 Budget

• October 2008, the stock market tanked
• By the beginning of November, economic

forecasts were dramatically reduced

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• Leading to dramatic reductions to projected

revenues:

 For two fiscal years combined, 2008-09 through

2009-10, our revenue forecast dropped by $31.3 billion

2009-10 Budget Act

• Starting in December, the Governor called a series of

special legislative sessions to close the budget gap

• January 2009, State Controller delayed payments to

contractors and delayed refund payments to conserve cash

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cash

• February, 2009-10 Budget Act was enacted with $41.7

billion budget solutions

 Expenditure reductions – $15.8 billion  Revenue increases – $12,5 billion  Federal stimulus funds – $8.0 billion  Borrowing – $5.4 billion

Major Revenue Provisions

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Provisions

Major Revenue Provision 2008-09 Budget Act

Constraint: Revenue provisions may not increase taxes

• Temporary net operating loss (NOL)

suspension followed by new NOL carryback

• Temporary business incentive tax credit

limitation followed by enhanced use of credits

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limitation followed by enhanced use of credits

• Accelerate estimated payments
• Eliminate prior year exception safe harbor for

high income personal income tax (PIT)

• Understatement of tax penalty for large

corporations

2008-09 Budget Act Revenue Provisions Fiscal Years (Dollars in Millions) 2007-08 2008-09 2009-10 Establish a 20% penalty for corporations that understate their taxes by $1,000,000 or more; effective for tax years 2003 and later; penalty is effective starting June 1, 2009. 1,435 75 45 One-year test for vehicle & aircraft use tax

• 16

21 Modified group income tax returns

• 2

2 Suspend NOL's for tax years 2008 through 2009, exempting taxpayers with income under $500,000. Beginning in 2011, allow two year carryback of NOL's. Limit carrybacks to 50%

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$500,000. Beginning in 2011, allow two year carryback of NOL's. Limit carrybacks to 50% for 2011 and 75% for 2012; 100% carrybacks after 2012. NOL's may not be carried back to tax years prior to 2009.

• 1,265

695 Limit business incentive credits to 50% of tax before credits for tax years 2008 through 2009, exempting taxpayers with income under $500,000. Starting in 2010, allow sharing of business incentive credits within unitary groups.

• 615

260 LLC payment date change; effective 2009

• 360

36 Accelerate estimated payment percentages; effective 2009

• 1,270

240 Remove estimated payment option for taxpayers with income over $1 m (joint/ $500 k single), effective 2009

• 1,035

135 Accrual change 416 1,440 133 Total 1,851 6,078 1,567

Major Revenue Provision 2009-10 Budget Act

• Temporary 1% sales tax increase
• Temporary 0.25% PIT increase
• Temporary vehicle license fee increase from 0.65% to

1.15%

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1.15%

• Temporary reduction to dependent credit from $309 to

$99 per dependent

• Elective Single Sales Factor (SSF) apportionment for

tax years beginning on and after 2011

• Special election – May 19th

 Enhance and securitize lottery revenue stream ($5 billion)  Extend by one to two years sales tax and PIT tax increases

2009-10 Budget Act Revenue and Borrowing Provisions

Fiscal Years (Dollars in Millions) 2008-09 2009-10 Total Temporary one-cent increase in the state sales tax, in effect from April 1, 2009 through June 30,

• 20121. This will raise the state tax rate from 5.00 percent to 6.00 percent and the total tax rates,

including various local and special purpose rates from an average of 7.95 to 8.95 percent. 1,203 4,553 5,756 Temporary increase in Vehicle License Fees effective May 19, 2009 through June 30, 20131. This will raise the total rate from 0.65 percent to 1.15 percent with 0.35 going to the General Fund and 0.15 percent going to local law enforcement 346 1,692 2,038 Temporary increase of 0.25 percent in each personal income tax rate 2009 through 2012. 3,658 3,658 Temporary reduction in the Personal Income Tax exemption credit for dependents to the amount

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Temporary reduction in the Personal Income Tax exemption credit for dependents to the amount provided for the personal credit for tax years 2009-2012. This will reduce the credit from $309 to $99.

• 1,440

1,440 Temporary $3,000 job creation credit for small businesses under both the personal income and corporate tax laws. At total of $400 million is provided for these credits. (15) (330) (345) Temporary house purchase credit of 5.0 percent of cost up to $10,000 available for never-occupied houses purchased between March 1, 2009 and March 1, 2010

• r until $100 million in credits is reserved.
• (33)

(33) Borrowing Solutions: One-time loans and transfers of surplus funds from special funds 268 134 403 Proceeds of the securitization of lottery revenues will be used to offset General Fund expenditures in 2009-10.

• 5,001

5,001 Total 1,802 16,116 17,917

Looking Forward

• Economy has further deteriorated since the

Budget Act forecast

• In March the California unemployment rate

spiked to 11.5%

• April revenues are likely to fall substantially

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• April revenues are likely to fall substantially

below projection

• I’ve lowered my expectations:

 My hope now is that the rate of decline has finally

declined

 But I only have a couple data points

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