State coffers bulging with early tax collections

California’s income tax collections in December came in a whopping $4 billion or 32 percent above expectations — and some of the surprise came not from growth in the economy but from people speeding up their final 2017 state income tax payments before federal tax law changes took effect Jan. 1.

The Legislative Analyst’s Office reported Wednesday that personal and corporate income tax revenue in December totaled $16.3 billion, far above the $12.4 billion target reflected in last June’s state budget plan.

In the first five months of the fiscal year, July through November, tax

collections were running only 1.5 percent ahead of the forecast, according to the California Department of Finance.

County tax collectors are also reporting a wave of last-minute property tax payments, as homeowners rushed to pay the second installment of their 201718 bill before Dec. 31 rather than waiting until the April 10 due date.

San Francisco has already received 82,595 second-half payments totaling $419.3 million. At this time last year, it had received only 46,549 second-half payments totaling $183.6 million.

Santa Clara County is still processing secondhalf payments that came in between Dec. 18 and 31, but so far it has processed more than $500 million, 18 percent of the $2.8 billion billed for the second half. During the same period last year, it collected only $50 million in second-half payments.

Alameda County is also still processing its backlog of last-minute payments. “It was unbelievable. There were huge lines (of people waiting to pay their taxes) that we were completely unprepared for,” said Hank Levy, Alameda County’s treasurer-tax collector.

Counties know how much they ultimately should receive in property taxes this year, but the challenge for state government is figuring out how much of the December rise in income taxes came from an underlying increase in income and capital gains, versus people simply accelerating their 2017 income tax payments.

Of the nearly $4 billion difference in December, about $2.7 billion came from personal income tax payments received by the Franchise Tax Board. Only $175 million came from an increase in payroll tax withholding.

“The positive December personal income tax results could be partially offset by softer January and April collections, as some taxpayers may have made final 2017 tax payments a few months early in order to maximize deductions under the recently passed federal tax plan,” the Legislative Analyst’s Office said on its website.

People who itemize deductions on their federal return can deduct all of their state and local income and property taxes in 2017, but starting with tax year 2018, they can deduct a total of $10,000 in all state and local taxes combined. (Property tax on rental homes is still deductible as a rental expense.)

After the tax bill was signed on Dec. 22, many taxpayers in California scrambled to pay the second installment of their 2017 property tax payment that is not due (without penalty) until April 10. The Internal Revenue Service clarified that property taxes could be deducted in 2017 as long as they were assessed and paid in 2017.

Likewise, people who expected to owe additional state income taxes for 2017 could pay them before the end of last year and deduct them on their 2017 federal tax returns. If they waited until January or April to make the payment, it’s not deductible on 2017 returns. (Jan. 16 is the deadline this year for making the fourth quarter 2017 estimated state income tax payment and April 17 is the deadline for paying any remaining 2017 taxes due. That’s why prepayments could “steal” tax revenue from January and April.)

H.D. Palmer, a spokesman for the California Department of Finance, said it’s too soon to be popping any Champagne corks. “It’s likely that some of this positive development for December may be related to timing and taxpayer payment behavior and not growth in underlying tax liability,” he said.

The proposed 2018-19 state budget that Gov. Jerry Brown will unveil on Wednesday was put together before the federal tax bill passed and does not incorporate any direct or indirect effect it may have on state finances, Palmer added. The state will know more about its impact “as we get further into 2018.”