Tax revenues may be the most reliable of all government economic statistics, as few people volunteer to pay more taxes than they owe (I’m looking in your direction, Mr. Buffett).
I remember reading a couple of years back in Dennis Gartman’s letter that he believed the years 2004-07 were actually stronger than thought economically because tax revenues continually exceeded expectations.
Well, we have some not so good news on the California economy today – my friend and esteemed Cornell graduate Kevin Yamamura writes in our local Sacramento Bee that tax revenues will land 4% below projections:
The state’s nonpartisan budget analyst on Wednesday said California will fall $3.7 billion short this fiscal year, likely resulting in fewer public school days, cuts to libraries and further reductions in developmentally disabled services.
Gov. Jerry Brown and Democratic lawmakers counted on that money – to be generated by projected tax revenues – in a fit of summer optimism when they drafted the state budget. But Legislative Analyst Mac Taylor now predicts California will land 4 percent shy of the $88.5 billion in revenues they banked on in their plan.
Moseying on over to the State Controller’s office, John Chiang reports a bad October and start to the fiscal year:
State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in October, showing revenues came in $810.5 million below projections from the recently passed state budget.
“October’s poor revenues capped a very disappointing first four months of the fiscal year,” said Chiang. “Unless revenues and expenditures begin to track with projections, the State will face increasing cash pressure in the months ahead.”
Where’s the shortfall coming from? Back to Mr. Chiang:
Both corporate taxes and sales taxes are trailing behind their estimates by roughly $400 million so far this year. These losses are being partially offset by personal income taxes so that the overall variance on the “Big 3” sources of revenues is just 1.6%.
The $4 billion of projected revenues’ failure to materialize does increase the probability of the budget’s trigger cuts being pulled. This could create additional strain on our education and social services infrastructure, and could prolong the employment slide at the state and local levels, which has impeded a speedy recovery.
Additionally, October was a particularly bad month for personal income taxes, with actuals falling short of projections by more than $451 million. According to the Franchise Tax Board, this was driven by both falling withholdings and reduced estimated tax payments relative to projections.
California’s unemployment situation, meanwhile, is significantly worse than the nation’s at large.
The California jobless rate was 11.9 percent in September, above the 9.1 percent national level and up from 11.7 percent in June. Unemployment hasn’t been less than 11 percent since April 2009 in the Golden State.
And these are reported numbers – imagine what California unemployment really is! It’s probably north of 20%.
Over the past half-century in America, it has seemed that as California goes, so goes the nation at large. But I wonder if that will be the case going forward. This state has a bifurcated economy, where the Silicon Valley and Hollywood types have spun off enough excess capital to seemingly keep the rest of the state busy – building tract homes, slinging organic yogurt, whatever. But as the air has gotten thinner at the top of the economic food chain, there’s been a trickle-down effect akin to a shower of acid rain.
Part of me envisions a comeback (though perhaps only in relative terms) on the part of the “flyover states”. The midwest should be well positioned if the bull market in agriculture continues. Pennsylvania has a ton of shale natural gas that is reportedly driving a mini re-industrialization of the rust belt. Maybe it’s time to reverse the trade of the last 100 years and go short CA, long Nebraska?