San Francisco Chronicle - (Sunday)
Will tax ruling crash budget?
Now that the Franchise Tax Board has followed the Internal Revenue Service and given most Californians until Oct. 16 to file their 2022 state income tax return and pay any taxes due, will the state have enough money to pay its bills?
From around the mid-1980s through 2014, the state routinely borrowed money from outside sources to cover short-term imbalances between revenues and expenditures. During the fiscal crisis of 2009, it even had to issue IOUs to pay some vendors, local government agencies and taxpayers awaiting refunds.
But thanks to good economic conditions, higher tax rates and new laws, experts say California has enough internal resources to tide it over until Oct. 16 if most people who owe money wait that long to pay.
“It’s unlikely that pushing deadlines to October would lead us to running out of money to pay the bills,” said Brian Uhler, a deputy analyst with the California Legislative Analyst’s Office. But “it could make it harder for the Legislature to put together the budget plan in June.”
Postponing tax deadlines until October will push tens of billions of dollars from the 2022-23 fiscal year, which ends June 30, into 2023-24. “The main impact of extensions would be prolonging the uncertainty policymakers are already facing around what revenues they’ll have to work with in the coming fiscal year,” Moody’s analyst Emily Mandel said in an email.
The personal income tax makes up about 61 percent of state general fund revenues. This includes taxes from individuals and from sole proprietorships, partnerships, S corporations and limited liability companies that file business income on personal tax returns.
About 70 percent of personal income taxes arrive year-round via payroll withholding and will be unaffected by a deadline change. “That money we are still getting,” Uhler said.
The rest comes from payments people make when they file their tax returns and from estimated tax payments that many people with business, investment or retirement income make four times a year. (In most years, people can file a federal or state tax return as late as mid-October, but still have to pay any taxes due by the April deadline or risk getting a latepayment penalty. The IRS announcement delays both the filing and payment deadline until Oct. 16.)
State budget watchers keep a close eye on April receipts because they typically account for 15 percent to 19 percent of total personal income tax revenues, according to the California Department of Finance. Last year, the state collected $25 billion in
April.
In January, the IRS gave people living in federally declared disaster areas that covered most of California (including every Bay Area county) and parts of Georgia and Alabama a bit more time.
It gave these people until May 15 to file their 2022 tax returns and make payments that would have been due April 18, and to make quarterly estimated tax payments normally due in January and April. The new deadline also applied to various business returns normally due on March 15 and April 18.
The FTB conformed to those same deadlines for California taxes.
On Friday, the IRS threw the state a bigger curve ball. It postponed not only those deadlines, but also the deadlines for estimated payments due in June and September, until Oct. 16.
After reviewing the IRS announcement, the FTB on Thursday said it would again follow suit.
Earlier this year, the state estimated that the shorter postponement until May 15 “could shift about $20.9 billion of combined January-April tax revenue into May,” including a $19.3 billion shift in personal income tax, David Hitchcock, a senior director with S&P Global ratings, said in a report.
California has always faced cash-flow imbalances because it has to pay bills all year but its revenues are lumpy. Before 2015, it usually borrowed money from investors by selling revenue anticipation notes or RANs early in the fiscal year and paying them off late in the year, after the bulk of tax revenues had come in.
Since then, two actions “helped to increase the state’s cash cushion” and made RAN issuance unnecessary, H.D. Palmer, a spokesman for the state finance department, said via email. In 2009, the Legislature passed several laws that broadened the list of “internally borrowable funds.” In 2014, voters passed Proposition 2, which updated the rules governing the Budget Stabilization Account (better known as the rainy day fund) and created the Public School System Stabilization Account. It also made these reserves available for borrowing.
“These two actions — combined with significant revenue increases in recent years and prudent budget and cash management policies — have meant that the state has had ample resources on hand that have made external cash flow borrowing unnecessary,” Palmer said.
At the end of January, the state had $32.7 billion in general fund cash and $126.5 billion in unused borrowable resources. With the state pushing the tax payment deadline into October, “It’s certainly our hope and expectation that our historically high cash resources will continue to be sufficient so that RANs will not have to be issued,” Palmer added.
In California, the top 1 percent of taxpayers account for about half of personal income tax revenues, and they are likely to pay in October now that the FTB has postponed the deadline. “The people who pay the millionaire’s tax will probably defer,” said Karen Krop, senior director at Fitch Ratings (which like The Chronicle is owned by Hearst Communications).
She and Hitchcock stressed that the deferral will affect the timing, but not the amount of tax revenues collected. The big impact will be on budgeting.
“With the stock market down and tech showing some strain, but at the same time wage growth still strong, California’s already in a difficult environment for forecasting income tax revenues,” Mandel said.
The new October tax deadline will “also make it harder for (lawmakers) to make specific policy changes,” said Chris Hoene, executive director of the California Budget & Policy Center.
For example, if the state wanted to expand access to food assistance or health care at a cost of $50 million a year, even though it’s not a huge amount, it might be hard to do because the “knee-jerk reaction would be let’s say no to anything that adds to expenditures” because there are “just too many unknowns,” Hoene said.
This is not the first time tax deadlines have been extended. In 2020, federal and state tax deadlines were delayed until July 15 for everyone because of the pandemic, but that was only half a month into California’s new fiscal year. State income tax payments received in July 2020 “were scored on a budgetary basis” as having been received in fiscal 2019-20, which ended June 30, 2020, Palmer said.