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  Major Revenue Provisions Enacted in 2008 and 2009  Commission on the 21 st Century Economy (COTCE) Department of Finance 2

Overview of California Revenues Revenues Department of Finance 3

General Fund Variability General Fund Variability 1.66 $8,000 1.70% $6,961 $7,000 1.40% $6,000 1.10% $5,000 $5,000 1.02 1.02 0.87 $4,191 $4,000 0.80% 0.75 0.70 $3,000 $2,311 0.50% $2,263 $1,828 $2,000 $1,369 0.20% $940 $1,000 $700 $249 $217 $0 -0.10% 1959-1968 1969-1978 1979-1988 1989-1998 1999-2008 Average Growth Rate Standard Deviation Coefficient of Variation Department of Finance 4

2009 2009-10 General Fund Expenditures 10 General Fund Expenditures (Dollars in Millions) (Dollars in Millions) Department of Finance 5

California State and Local Own California State and Local Own Source Revenues 2005 Source Revenues 2005-06 06 (Dollars in billions) (Dollars in billions) Local State $101.9 $134.8 43% 57% Department of Finance 6

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 $16,438, 15% Special Funds $95,343, 85% General Fund Department of Finance 7

General Fund Revenue Sources General Fund Revenue Sources 2007 2007-08 08 Other 6% Corportion tax 12% Personal income tax 55% Sales tax 27% Department of Finance 8

California State Revenues by Source California State Revenues by Source ($ Billions) ($ Billions) 100% 90% 80% 70% 11.3% 12.7% 60% 44.6% 45.3% 40.7% 53.4% 32.8% 57.5% 35.4% 28.2% 28.2% 53.4% 53.4% 16.8% 16.8% 18.1% 18.1% 50% 50% 40% 30% 59.4% 56.1% 44.5% 43.7% 20% 40.3% 39.5% 37.4% 36.3% 35.2% 34.2% 29.5% 27.4% 26.3% 10% 0% 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 Department of Finance 9

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 Ohio 17.2% 17.2% 22 22 11.8% 11.8% 18 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 Department of Finance 10

Revenues are More Volatile Than Revenues are More Volatile Than the Economy the Economy 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Personal Income Revenues -20.0% 1970 1975 1980 1985 1990 1995 2000 2005 Department of Finance 11

Revenue Shortfalls and Solutions Solutions Department of Finance 12

Budget Cycle  January  Governor’s budget for upcoming fiscal year (July – June)  May  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 Department of Finance 13

2008 May Revise  2008-09 Budget had identified a structural imbalance  By May Revise the economy started to  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 Department of Finance 14

2008-09 Budget Act  Enacted September 2008  Included $23.9 billion budget solutions  Revenue related – $12.6 billion  Revenue related – $12.6 billion  Spending related – $11.4 billion  End of year reserve – $1.7 billion Department of Finance 15

Department of Finance 16

(+20.3%) (-17.2%) Department of Finance 17 17

2009-10 Budget  October 2008, the stock market tanked  By the beginning of November, economic forecasts were dramatically reduced  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 Department of Finance 18

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 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 Department of Finance 19

Major Revenue Provisions Provisions Department of Finance 20

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 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 Department of Finance 21

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; 1,435 75 45 effective for tax years 2003 and later; penalty is effective starting June 1, 2009. 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% $500,000. Beginning in 2011, allow two year carryback of NOL's. Limit carrybacks to 50% - 1,265 695 for 2011 and 75% for 2012; 100% carrybacks after 2012. NOL's may not be carried back to tax years prior to 2009. 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 - 615 260 business incentive credits within unitary groups. 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 - 1,035 135 single), effective 2009 Accrual change 416 1,440 133 Total 1,851 6,078 1,567 Department of Finance 22

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% 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 19 th  Enhance and securitize lottery revenue stream ($5 billion)  Extend by one to two years sales tax and PIT tax increases Department of Finance 23