April income taxes $3.3 billion over forecast
A strong "shower" of April revenues makes way for the May Revision to bloom next week
April Collections Were Strong. April 2026 California income tax collections—personal income tax (PIT) and corporation tax (CT) combined—totaled $30.5 billion, which was $3.3 billion (12.1%) more than projected in the Newsom administration’s most recent budget forecast, which was released on January 9. PIT and CT collections were $2.3 billion above projections at the Franchise Tax Board—slightly weaker than I thought as of last week. PIT withholding collections (principally at the Employment Development Department) were more than $1.0 billion above projections. This preliminary data from California’s tax agencies is subject to later adjustment.
2025-26 Income Taxes Up More Than $10 Billion. For the 2025-26 fiscal year to date, through April 30, California income taxes are $10.9 billion (7.3%) above the administration’s January forecast. June is another large collection month, but will occur after the May Revision revenue forecast—which typically is the revenue forecast used in the annual state budget in June. Given the roaring stock market of late, it is plausible to expect that 2025-26 state General Fund revenues will end up $10 billion to $15 billion above the January forecast.
2026-27 Revenue Forecast Poised to Rise Too. I have no way of knowing what will be projected in the Governor’s upcoming May Revision. With the increase in 2025-26 revenues, California’s progressive income tax code, and U.S. stock prices up almost 30 percent from one year ago, it is a good bet that 2026-27 revenues—once they are all collected next year—also will rise significantly above this administration’s January 2026 projections. In January, the Newsom administration projected that all General Fund taxes would total the following by fiscal year:
2024-25: $213.4 billion
2025-26: $222.2 billion (up 4%)
2026-27: $228.5 billion (up 3%)
2027-28: $233.1 billion (up 2%)
If 2025-26 revenues rise to more than $232 billion and one assumes just a 5% year-over-year increase for 2026-27, that would suggest a $15 billion increase for 2026-27 General Fund revenue projections. If one assumes a 7.5% year-over-year increase for 2026-27, that would suggest a $21 billion increase for 2026-27 revenue projections. Even bigger increases in revenue are possible during 2026-27, given upcoming technology IPOs and recent stock market performance—one of the strongest year-over-year increases in stock prices ever before a May Revision (see chart below). Conversely, if the stock market drops or California’s tech economy slumps, revenue declines are still possible in 2026-27.
Schools, Community Colleges, and Reserves Entitled to Most of the New Revenue. As I say every time, under California’s constitutional requirements, schools and community colleges (Proposition 98) and the state’s main rainy day fund (Proposition 2) are entitled to receive more than half of the added revenues in most circumstances. Moreover, the Governor omitted $5.6 billion of required Proposition 98 funding (sometimes called “settle up”) in his January proposal. If, hypothetically, 2025-26 and 2026-27 revenues rise in the May Revision by a combined $25 billion, schools and reserves might be on track to receive 60 percent ($15 billion) or more of that new money. In addition, fully funding the $5.6 billion omitted from the January proposal could mean that more than 80 percent of that new revenue would be obligated in total. This means that less than 20 percent of the higher revenues might be available to add more to reserves or undo budget cuts.
State Costs Are Rising. Due to economy-wide increases in health costs and inflation—not to mention the federal government’s determined cutting of safety net programs—state costs have been rising. The Legislative Analyst’s Office (LAO) recently noted that the large bulk of state cost increases since 2019 have been to fund services that were already in place prior to the pandemic. Post-2019 program expansions, including expansions of Medi-Cal, also have contributed to cost increases, of course. To help address the state’s rising costs, the Legislature adopted about $2.5 billion of budget reductions in the 2025 budget, LAO has noted, which were projected to grow to $10.5 billion of budget savings by 2028-29. Because of federal attacks on state and local programs, as well as rising costs generally, California’s budget continues to be fragile, despite the strong tax collections of late. As the administration and legislative leaders have noted, additional corrective actions likely will be needed to bring the state budget closer to a sustainable structural balance.