California revenues remain strong in March
Large portion of this year's revenue gains likely obligated for schools and reserves
California collected $1.4 billion (10.8%) more than projected in state income taxes during March, principally due to gains in corporation taxes. Specifically, corporate income tax collections were $902 million (20.5%) more than projected. Personal income tax (PIT) collections, net of refunds, were up $474 million (5.7%), with gains split between PIT return payments and withholding.
The figures come from preliminary state tax agency data, which is subject to correction in the coming weeks. These numbers compare actual collections to projections in the Governor’s January 9 budget proposal.
For the 2025-26 fiscal year through March, income taxes are running $7.5 billion (6.2%) above the Governor’s January 9 projections, with the big collection months of April and June still to come.
As I said on March 19, I think an upward revenue revision of between $10 billion to $30 billion remains possible across the two fiscal years, 2025-26 and 2026-27, in the Governor’s May Revision. That revised budget proposal is due on May 14. Such an upward revision may result in at least a small budget surplus for this year’s budget process. My expectations may change significantly—up or down—based on PIT collections during the next two weeks of April, which is one of the biggest tax collection periods of the year.
At least 40% of any revenue gains since January 9 are likely to be dedicated to schools and community colleges due to the Proposition 98 minimum funding guarantee. Moreover, under the revenue estimates in the January 9 proposal, the 2025-26 Proposition 98 guarantee increased to $121.5 billion, but the Governor only proposed $115.9 billion, resulting in an unfunded $5.6 billion obligation sometimes called Proposition 98 “settle up.” If that $5.6 billion is funded in this year’s budget process, more than 40% of the revenue gains will end up going to Proposition 98. In addition to school funding requirements, perhaps 20% of revenue gains or more can be expected to go to General Fund reserves, as required by Proposition 2.
In other words, a very large percentage of the revenue gains may be obligated and, therefore, unavailable for new spending commitments or restorations.
Despite this apparent short-term revenue surge, the federal administration’s reckless policies add to economic risks and may dampen the administration’s revenue outlook in the May Revision. Federal policies already threaten the state’s ability to maintain existing spending levels and will reduce benefits available to millions of Californians in need. Even if a surplus is estimated for this year’s budget, the state’s current-law levels of spending probably are not sustainable, given current tax policies. Future deficits are likely, and when a recession or big stock market drop comes, those deficits could be very large. Additional spending cuts and/or tax increases likely will be needed for future state budgets.