The Budget Is Coming! The Budget Is Coming! - Part 2

Jacob Sisney of the Legislative Analyst's Office (LAO) provides this email note (below) concerning the state budget. On January 10, we will see the actual proposal for 2025-26 from the governor and a cash report through December from the controller:

Preliminary tax agency data shows that, in December, California collected $12.4 billion in net personal income tax (PIT) receipts ($2.9 billion above the monthly forecast from last year’s budget) and $10.3 billion in net corporation tax (CT) receipts ($71 million above the monthly forecast).

In total, December 2024 PIT and CT receipts were up 30% from December 2023, including a 27% increase in PIT withholding, which alone contributed $1.9 billion of the PIT overage for the month. (The late Thanksgiving holiday helped push some collections into December. For the two months of November and December combined, PIT withholding was up 11% from last year.)

At the end of November, state General Fund receipts in the 2024-25 fiscal year were running $4.3 billion above the 2024 budget forecast. If other revenues are close to their forecast targets in December, the PIT and CT performance would boost fiscal year-to-date collections to more than $7 billion above the 2024 budget forecast.

In previewing his January 10, 2025 budget proposal earlier this week, Governor Newsom said the soon-to-be-released Department of Finance forecast update would project General Fund revenues at $16.5 billion above the 2024 forecast for the fiscal years 2023-24, 2024-25, and 2025-26 combined. Actual revenue performance through December suggests that revenues could be significantly above this level through at least 2024-25. A portion of any revenue overage goes to Proposition 98 school funding, and while the Governor said that Finance’s 2025-26 estimates indicate a small budget surplus (inclusive of a $7 billion withdrawal from the state’s main rainy day fund), he did not identify the projected level of future deficits, which the Legislative Analyst’s Office in November pegged at $20 billion to $30 billion per year.

Furthermore, uncertainty about policies of the incoming federal administration and Congress is significant. Widely discussed proposals to cut Medicaid could add billions to California’s future deficits, before considering other fiscal and economic changes that may be considered...