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Old 04-27-2003, 10:29 AM
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Default Tax shortfall projected to deepen California deficit

State's income tax receipts coming up short
Tax shortfall projected to deepen California deficit

Greg Lucas, Lynda Gledhill, Chronicle Sacramento Bureau Sunday, April 27, 2003


Sacramento -- Income tax collections for April are running $3 billion below the state's already low expectations, worsening an already enormous budget shortfall of as much as $34.6 billion.

Gov. Gray Davis predicted the state would receive income tax receipts of $6. 3 billion this month. Actual collections through April 25 totaled only $3.1 billion.

The final days of the month will add some revenue but traditionally not a lot, leaving lawmakers and the Democratic governor to fill a bigger hole with deeper cuts or higher taxes.

Even worse, lawmakers have saved about $2 billion less than Davis hoped this year, putting the state that much further from closing its budget gap.

"The numbers don't look too good," said Sen. Richard Ackerman, R-Irvine, vice chairman of the upper house's budget committee.

"Not only are we taking in less money, but we're continuing to spend more than last year," Ackerman said. "You can't run a railroad like that."

The trailing tax receipts stem largely from a reliance on Californians who earn $150,000 a year or more. Payments by that group, the top 5 percent of taxpayers, represented 68 percent of state income taxes in 2000.

The income for wealthy Californians is less dependent on salaries and more dependent on the economy and stock market conditions.

Davis declined to discuss how far tax collections are below his estimates. He is scheduled to map out a revised budget plan May 14, after reviewing the state's cash condition.

"It's one of those unpredictable forecasts," said Steve Maviglio, the governor's press secretary, of the tax returns. "We'll keep an eye on it until the final numbers come in."

April tax returns often make or break budgets.

In 2000, an ever-upward stock market handed the state $11.5 billion in April -- $6.3 billion more than expected.

The surplus grew to become $12 billion, comprised largely of wealthy Californians cashing out capital gains and cashing in stock options.

Even as the market went south in 2001, the state still did well in April, hauling in almost $13 billion -- $1.7 billion above projections.

Last April, California was hammered. The stock market's fall, particularly in the technology sector, wiped out the state's comfortable stream of taxes on capital gains and stock options.

Personal income taxes were expected to be $8.3 billion but were only $5.8 billion. Refunds were $1 billion higher than anticipated.

That and a flat economy contributed to a budget hole of more than $24 billion, which in turn helped create this year's $34 billion disaster.

The governor's Department of Finance predicted this year total income tax receipts of $7.5 billion in April, less nearly $1.2 billion in refunds.

As of Friday, the Franchise Tax Board recorded more than $1.1 billion in refund requests -- on track with the governor's prediction.

But subtracting those refunds from the actual payments received by the board of $4.3 billion leaves a total far lower than predicted by Davis.

State budget counters have their fingers crossed, though, that the last two days of the month will be stronger than normal.

They say delays in opening returns last week may mean a greater number of checks uncounted at month's end than usual.

"Collections are soft, relative to the estimates," said Liz Hill, the Legislature's chief budget analyst. "But there have been some processing problems so we won't know what the final performance will be."

The tax board said its last tally for the month will be Tuesday. In previous years, the final days of April have seen sharply reduced receipts.

Senate President Pro Tem John Burton, D-San Francisco, and other Democratic lawmakers declined to speculate on how weak April receipts would be.

Like Davis, Burton said he would wait for May to assess the budget's condition.

In an April 25 letter to lawmakers, Steve Peace, director of Davis' Department of Finance, said the state is already $2.4 billion off its savings target.

That is mainly because lawmakers balked at nearly $2 billion in cuts to cities and counties sought by Davis. Another is a lower estimate of the proceeds California will get from selling the future annual payments it was supposed to receive from settling its lawsuit against the tobacco industry.

The tax receipt woes could put a damper on efforts by Assembly Democrats to win GOP approval for a package of $2.2 billion in bonds and $2.5 billion in additional spending cuts.

Republicans have yet to embrace the idea, saying they are not keen on placing the state more in debt.

Democrats still insist that the state's budget hole cannot be closed simply through cuts. They want tax increases to cover part of the problem.

Republicans continue to show no interest in providing the votes needed to raise taxes.

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