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ince the 2021 Budget Act, California’s economy has continued its recovery from
the COVID-19 Recession. In addition to the growth in the real economy, inflation
has significantly accelerated. Meanwhile, higher-wealth segments of the economy
continue to do well. These factors have contributed to a significant upgrade to the
revenue forecast. Before accounting for transfers such as to the Budget Stabilization
Account, General Fund revenue is higher than the 2021 Budget Act projections by
almost $28.7 billion from 2020-21 through 2022-23.
To illustrate the magnitude of this increase: 18 months ago, at the depth of the
COVID-19 Pandemic, revenues for the 2022-23 fiscal year were forecast at less than
$130 billion. The Budget now projects this revenue at nearly $200 billion—an increase of
more than 50 percent.
The 2022-23 Governor's Budget General Fund Revenue Forecast figure compares the
revenue forecasts, by source, in the 2021 Budget Act and the Governor’s Budget. The
Governor’s Budget reflects actual and anticipated reimbursements from the federal
government for fiscal years 2020-21 through 2022-23 totaling approximately $10.3 billion
for reimbursement of costs associated with the state’s response to recent (2018, 2020,
and 2021) wildfires and the COVID-19 Pandemic.
General Fund revenue, including transfers, is expected to be $196.7 billion in 2021-22
and $195.7 billion in 2022-23. The projected increase since the 2021 Budget Act can be
attributed to four main factors: (1) a more robust economic recovery, (2) a greater
share of wage gains going to high-wage sectors, (3) a stronger-than-forecast stock
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market, and (4) higher inflation. The personal income tax forecast has been upgraded
significantly, reflecting all four of these factors. The sales tax forecast has improved
considerably due to the stronger economic recovery and higher inflation (price
increases have led to more sales tax revenue). The corporation tax forecast has
improved significantly due to very strong growth in corporate profits.
The recently adopted elective pass-through entity tax allows California business owners
to mitigate the impact of the $10,000 limit on state and local tax deductions that was
imposed by the 2017 federal Tax Cut and Jobs Act. For simplicity’s sake, the 2021
Budget Act reflected the net effect of this change—a reduction in personal income tax
revenues and an increase in corporation tax revenues—as affecting corporation tax
revenues only. The Budget forecast more accurately reflects the impact to both the
personal income tax and corporation tax revenues. This revised scoring decreases
personal income tax revenues by $14.1 billion in 2021-22 and $9.7 billion in 2022-23 while
increasing corporate tax revenues by $12.4 billion in 2021-22 and $9.4 billion in 2022-23.
Because at least some of the personal income tax credits generated by the payment
of this tax will not be fully usable to business owners, this provision will generate
cumulative net revenue gains over the years it is expected to be operative. The
corporation tax in the 2022-23 Governor's Budget General Fund Revenue Forecast
figure is up by almost 82 percent in 2021-22 and by almost 37 percent in 2022-23, while
personal income tax revenues are actually down about 2 percent in 2021-22 and up
only 1.4 percent in 2022-23, despite the significant improvement in the underlying
personal income tax forecast.
Over the budget window, personal income tax is up $2.5 billion, sales tax is up
$6.1 billion, and corporation tax is up $23.2 billion. Accruals of revenues to previous
years for corporation tax and personal income tax increase the 2020-21 beginning
balance by $642 million.
The Capital Gains Revenue figure shows revenue from capital gains as a percentage of
total General Fund tax revenue. As seen from this figure, the amount of capital gains
revenue in the General Fund can vary greatly over time and from year to year. For
instance, capital gains contributed only $2.3 billion to the General Fund in 2009. By 2012,
this revenue had increased to $10.4 billion, and for 2021, it is expected to reach
$25 billion—its highest amount ever.
The Capital Gains Realizations figure shows capital gains reported on California tax
returns from 1970 through projections for 2022. While the level of capital gains has
grown significantly since 1970 (along with the economy and total personal income
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tax revenue), capital gains volatility has been a constant, and history shows that high
levels of capital gains eventually drop off.
The highest-income Californians pay the largest share of the state’s personal income
tax. For the 2019 tax year, the top 1 percent of income earners paid almost 45 percent
of all personal income taxes. This percentage has been greater than 40 percent in
every year since 2004, except for 2009. The share of total adjusted gross income from
the top 1 percent of income earners has increased from 13.8 percent in 1993 to
23 percent in 2019. This number has also exceeded 20 percent in every year since 2004,
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except in 2009. Consequently, positive or negative changes in the income of a
relatively small group of taxpayers can have a significant impact on state revenues.
These two related phenomena—significant reliance of the General Fund on capital
gains and on taxes paid by a small portion of the population—underscore the difficulty
of forecasting personal income tax revenue. Proposition 2 helps address some of the
state's revenue volatility by requiring the transfer of a portion of capital gains revenue
greater than 8 percent of General Fund tax revenue to the Rainy Day Fund and to pay
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down state debts. The Rainy Day Fund can be drawn down only if the Governor
declares a budget emergency and, even then, no more than 50 percent of the Fund
can be drawn down in the first year. See the Introduction Chapter for a more detailed
discussion of the Rainy Day Fund.
SYSTEM OF TAXATION
The state's tax system is detailed in the Outline of State Tax System figure. Tax collections
per capita and per $100 of personal income are displayed in Schedule 2 in the
Appendix. The revenue generated from each state tax from 1970-71 through 2022-23 is
displayed in Schedule 3 in the Appendix.
Although there are a variety of taxes in California’s tax system, the system is heavily
dependent on the personal income tax, and particularly on personal income taxes
paid by high-income individuals. While this dependence leads to a greater level of
volatility, it has actually been a buffer for revenues in the recent recession and
recovery. The COVID-19 Recession has had a significant negative impact on lower-
wage households, but the taxpayers who California depends on for much of its tax
revenue have generally not been impacted as severely, and have, in many cases,
benefited from overall economic conditions.
The past two recessions in 2001 and 2008 led to significant revenue declines because
the economic distress was spread more evenly over the population and because the
stock market suffered significant and long-term declines. In 2001, income earned by the
top 1 percent fell from 27 percent of the total in the prior year to just under 20 percent
and net capital gains realizations fell from $117 billion to $49 billion. In 2008, the share
earned by the top 1 percent fell from 25 percent to 21 percent and capital gains
realizations fell from $132 billion to $56 billion. In those two years, personal income tax
revenues dropped by 26 percent and 20 percent, respectively. For 2021, the share of
income is likely to increase for the top 1 percent of tax returns while capital gains
realizations are forecast to increase from $145 billion in 2019 to $245 billion in 2021.
GENERAL FUND REVENUE
The California State Revenue by Source figure shows how the composition of General
Fund revenues by tax source has changed over time. In 1950-51, sales tax revenue
made up over 50 percent of General Fund revenues while personal income tax
revenue made up just more than 11 percent. That relationship has changed
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dramatically over time: for 2022-23, personal income tax makes up 65.9 percent of all
General Fund revenues.
LONG-TERM FORECAST
The Long-Term Revenue Forecast figure shows the forecast for the three largest General
Fund revenues (personal income tax, sales tax, and corporation tax) from 2020-21
through 2025-26. Total General Fund revenue from these sources is projected to grow
from $180.1 billion in 2020-21 to $215.6 billion in 2025-26. The average year-over-year
growth rate for this period is 3.7 percent, which follows growth of nearly 30 percent from
2019-20 to 2020-21.
The economic forecast assumes economic growth continues after 2021 with real GDP
growth averaging 2.8 percent through 2024.
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REVENUE IN A RECESSION
The Budget revenue forecast is based on a scenario that assumes continued economic
growth. However, as discussed in the Economic Outlook Chapter, several risk factors
could either cause a significant slowdown in revenue growth or lead to a recession. The
impact of the Omicron variant or other potential future COVID-19 variants, persistent
supply chain issues, inflation, stock market volatility, and the lack of affordable housing
are all issues that pose a risk to ongoing economic and revenue growth.
Even in a moderate recession, revenue declines could be significant. However, the
state has taken several actions to better prepare for such an eventuality, including
building reserves, eliminating budgetary debt, reducing long-term retirement liabilities,
and focusing on one-time spending over ongoing investments to maintain structurally
balanced budgets over the long term. Schools, courts and other entities have also built
reserves for potential future downturns.
Additional deposits into the state's reserves would further prepare the state for future
economic slowdowns. Unfortunately, increased deposits into the reserves are not
exempt from the State Appropriations Limit, which the state is currently projected to
exceed. Thus, additional deposits without commensurate reductions in spending or
other changes would not increase reserves to weather a recession.
The magnitude of the revenue loss would depend upon the actual scenario triggering
a recession, an annual General Fund revenue loss in the range of $30 billion to
$40 billion for several years compared to the Budget forecast would not be
unreasonable. Revenue losses would be driven largely by declines in wages and in
capital gains. These significant revenue losses assume the recession falls relatively
heavily on higher-income individuals, as it did in the 2001 and 2008-09 recessions. On
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the other hand, if a recession were to fall largely on lower-income households, the
impact on revenues would likely be much smaller.
Certain spending requirements driven by revenues decrease in the case of a recession.
For example, required reserve deposits decline and the state’s minimum funding
obligation to schools generally declines by approximately 40 percent of revenue loss.
TAX PROPOSALS
The Budget includes eleven proposals to provide assistance to low-income households,
restaurants and venue owners, and small businesses, to encourage investment in
technologies that combat climate change, and to reverse a policy adopted as part of
the 2020 Budget that is no longer needed. The Economic Growth, Job Creation, and
Expanded Opportunity chapter includes discussions of the following proposals:
(1) conform to federal tax treatment of grants from the federal Shuttered Venue
Operator Grant program and the federal tax treatment of grants from the federal
Restaurant Revitalization Fund; (2) expand the elective pass-through entity tax to allow
the credit to reduce tax below tentative minimum tax and by allowing disregarded
entities to participate in the program; (3) new tax credits to encourage research and
development related to activities and technologies that mitigate climate change and
to fund pre-development costs for novel climate technologies. The proposals that will
be discussed in this chapter are the following:
• Eliminate the cap on the use of tax credits and net operating losses for the 2022 tax
year.
• Index the $1,000 Young Child Tax Credit (YCTC) amount to inflation.
• Allow the YCTC to be claimed by households with zero income.
• Create a $1,000 credit for young adults who have come through the foster care
system.
• Tax payment flexibility for low- and moderate-income households.
The revenue impact of all the tax proposals, including those proposals discussed in
other chapters, is shown in the Revenue Impact of Proposals Included in Budget table.
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ELIMINATE LIMITS ON USAGE OF NET OPERATING LOSSES (NOLS) AND TAX CREDITS FOR
THE 2022 TAX YEAR
The 2020 Budget included several revenue solutions in anticipation of a large structural
deficit. Among these were limits on the ability of large businesses to use NOLs and tax
credits for tax years 2020, 2021, and 2022. These limits were intended to be temporary
and to allow taxpayers to maintain the value of the credits and NOLs for later use. Since
the enactment of the 2020 Budget Act, the revenue picture has improved dramatically.
The Budget proposes to allow affected taxpayers to start fully using these tax benefits
one year earlier. The repeal of the limits is estimated to reduce General Fund revenues
by $5.5 billion in the budget year, with corporate tax revenues decreasing by $5.2 billion
and personal income tax revenues decreasing by $300 million.
CALIFORNIA EARNED INCOME TAX CREDIT (CALEITC)
The Budget includes a new refundable credit for young adults who have been in the
foster care program. Adults raised in the foster care system generally suffer
disproportionate levels of economic hardship. This proposal provides an additional
$1,000 credit for individuals who have been in the foster care system at some point at
age 13 or older and who are now at least 18 but 25 or younger, and who otherwise
qualify for the CalEITC. This proposal is expected to cost roughly $20 million ongoing
General Fund.
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The Budget expands the current YCTC to include households with no earned income.
The 2019 Budget created the YCTC to help lift young children out of poverty. In most
cases, this credit provides $1,000 to every household that otherwise qualifies for the
CalEITC and that has a child age 5 or younger. For the 2020 tax year, 420,000 taxpayers
claimed this credit and received credits totaling $390 million. Young children living in
households with no earned income are just as deserving of being protected from
poverty as are children living in households with low income.
Therefore, the Budget extends the YCTC to those households who have no or negative
earned income, but who otherwise meet the criteria for qualifying for a CalEITC. This
expansion of the YCTC is expected to cost about $55 million ongoing General Fund.
In addition, the Budget indexes the $1,000 YCTC for inflation starting in the 2022 tax
year. The other parameters of the CalEITC are indexed every year to prevent inflation
from eroding its value. The YCTC should also be indexed for inflation to prevent inflation
from diminishing the value of the YCTC for families with young children. The cost of
indexing will depend on the level of inflation and will compound over time. For the 2022
tax year, the cost of indexing is estimated at $19 million.
TAX PAYMENT FLEXIBILITY FOR LOW- AND MODERATE-INCOME HOUSEHOLDS
The Budget proposes to provide those hit hardest by the pandemic with additional
flexibility in meeting their tax obligations. Specifically, for tax years 2019, 2020, and 2021,
families with less than $150,000 in adjusted gross income ($75,000 for individuals) will be
given until September 30, 2023 to pay any personal income tax liability for those years
and will be relieved of any penalties and interest related to delayed filing or delayed
payment. Participating taxpayers would be allowed to make installment payments.
Late penalties and interest would again apply to outstanding amounts, if any, at the
end of the program.
PERSONAL INCOME TAX
The personal income tax is the state’s largest revenue source and is expected to
comprise 65.9 percent of all General Fund revenues in 2022-23.
The personal income tax is estimated to generate $128.2 billion in 2020-21, $120.9 billion
in 2021-22, and $130.3 billion in 2022-23. These figures reflect an increase of $3.1 billion in
2020-21, a decrease of $2.4 billion in 2021-22, and an increase of $1.8 billion in 2022-23,
relative to the 2021 Budget Act. These figures reflect a revised scoring of the elective
pass-through entity tax enacted in the 2021 Budget Act that decreased personal
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income tax revenues by $14.1 billion in 2021-22 and $9.7 billion in 2022-23. Absent this
revised scoring, personal income tax revenues would have increased by $3.1 billion in
2020-21, $11.7 billion in 2021-22, and $11.4 billion in 2022-23.
Modeled closely on federal income tax law, California's personal income tax is imposed
on net taxable income—gross income less exclusions and deductions. The tax rate
structure is progressive over the income spectrum. Since the 2012 tax year, the marginal
rates ranged from 1 percent to 12.3 percent, not including a 1-percent surcharge on
taxable income above $1 million for the Mental Health Services Act tax. Proposition 30
created three additional income tax brackets beginning in 2012 with rates of
10.3 percent for taxable income above $500,000, 11.3 percent for taxable income
above $600,000, and 12.3 percent for taxable income above $1 million, with the
income thresholds indexed for inflation. Proposition 30 held these tax brackets in effect
for seven years—tax years 2012 to 2018. Voters approved Proposition 55 in November
2016, extending the three additional tax brackets through tax year 2030.
This forecast assumes that there will not be a significant change in domestic migration
patterns between California and other states, with net outflows appearing to have
continued in 2021. International immigration typically brings hundreds of thousands of
people to the state, outweighing the losses in domestic migration. However, immigrant
visa processing remains at lower-than-usual levels due to pandemic-related issues. As a
result of the large increase in teleworking brought about by the COVID-19 Pandemic, it
is possible that there could be an increase in out-migration from California. If the
increase occurs, is large enough, and tends to affect mainly high-income households,
actual personal income tax revenues may fall significantly below projections.
A portion of personal income tax revenue is deposited into a special fund instead of the
General Fund. Proposition 63, passed in November 2004, imposes a surcharge of
1 percent on taxable income over $1 million. Revenue from the surcharge is transferred
to the Mental Health Services Fund and used to fund mental health programs.
Revenues of $3.0 billion are estimated for 2020-21. The forecast also projects annual
revenues of $3.7 billion for 2021-22 and $3.8 billion for 2022-23. The General Fund and
the Mental Health Services Fund shares of personal income tax revenues for 2020-21
through 2022-23 are shown in the Personal Income Tax Revenue figure.
The policy proposals in the Budget decrease personal income tax revenues by
$65 million in 2021-22 and $439 million in 2022-23. These include the proposals linked to
the CalEITC, the elimination of the limits on the usage of NOLs and business incentive
tax credits in 2022, conformity to federal tax treatment of certain federal grants to
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California businesses, and new tax credits to encourage research, development, and
implementation of climate solution technologies.
WAGES AND SALARIES
The largest income source for the personal income tax is wages and salaries. Although
the year-over-year growth rate for wages tends to be less volatile than other income
sources, wages and salaries include some unpredictable types of compensation such
as stock grants, restricted stock units, stock options, and bonus payments. In 2019, taxes
attributable to wages and salaries accounted for 60 percent of personal income tax
revenues.
A higher forecast for economic wages, which is in part due to higher inflation,
combined with wage growth projected to accrue disproportionately to higher-income
earners that are taxed at higher rates, is expected to increase withholding receipts
compared to the 2021 Budget Act by nearly $20 billion over fiscal years 2021-22 and
2022-23. Based on actual data through November 2021, withholding receipts are
expected to grow year-over-year by over 16 percent in 2021, following growth of over
7 percent in 2020. Cumulative growth of over 23 percent over two years has not been
seen since 2000. Economic wage growth was revised higher in 2021 from 3.8 percent as
of the 2021 Budget Act to 9.3 percent as of the Budget forecast. Based on strong tax
withholding in 2021, the wage strength is likely going to higher-income earners. The
expected growth for economic wages increased from 6.3 percent to 7.6 percent in
2022.
CAPITAL GAINS
The stock market has grown much more in 2021 than assumed as of the 2021 Budget
Act, and benefits mainly higher-income households. Based on the most recently
available tax data, taxes attributable to capital gains made up 14.8 percent of
personal income tax revenue in 2019, and that percentage is expected to be higher in
2020, 2021, and 2022. Capital gains realizations have been revised significantly higher in
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the Budget forecast, from $185 billion to $218 billion in 2020, $210 billion to $245 billion in
2021, and from $199 billion to $233 billion in 2022, based on strong cash receipts and a
stock market forecast that has been revised upward. The Federal Reserve’s
expansionary monetary policy has continued to contribute to the strength in the stock
market. However, the Federal Reserve began to reduce its asset purchases last fall and
has signaled increasing interest rates sooner than assumed in the Budget economic
forecast due to timing. Rising interest rates are expected to be a headwind for the
stock market going forward.
The Budget projects the S&P 500 will be at 4,700 in the first quarter of 2022, and will
expand annually at only 0.7 percent due to high valuations. The 2021 Budget Act
forecast the S&P 500 to be at 4,085 in the first quarter of 2022. Capital gains realizations
are assumed to decline from their peak levels in 2021 to reach 5 percent of personal
income by 2026, while the 2021 Budget Act assumed capital gains realizations would
revert to 4.5 percent of personal income in 2026. The higher target at the Budget is due
to a re-evaluation of historical data, which indicated a higher average level of capital
gains relative to the economy. Due to the slow growth expected from the stock market
due to its current high valuation, year-over-year declines in capital gains realizations are
expected for 2022 through 2026.
The higher levels and valuations in the stock market and the higher levels of capital
gains increase the risk of a large stock market decline leading to much lower capital
gains revenues. Estimated capital gains realization in 2020 and 2021 represent
7.9 percent and 8.3 percent of California personal income, respectively. These levels
are nearly at the pre-Great Recession peak of 8.4 percent in 2007 and are approaching
the all-time peak of 10.4 percent in 2000. Following those peaks, capital gains as a
percent of personal income declined to 1.9 percent in 2009 and 2.8 percent in 2002,
which represented peak-to-trough declines in capital gains realizations of 78 percent
and 72 percent, respectively.
SALES AND USE TAX
Strong consumer goods spending and an increased inflation forecast drive the sales tax
forecast upgrade from the 2021 Budget Act. Inflation has been particularly strong for
durable goods, the category of consumer spending most likely to be taxed. The sales
tax generated General Fund revenue of $29.1 billion in 2020-21 and is estimated to
generate $30.1 billion in 2021-22 and $32.2 billion in 2022-23. Compared to the 2021
Budget Act, these figures reflect an increase of $1.1 billion in 2020-21, $1.9 billion in
2021-22, and $3.1 billion in 2022-23. Receipts from the sales tax, the state’s
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second-largest revenue source, are expected to contribute 16.3 percent of all General
Fund revenues in 2022-23.
The sales tax is generally applied to the sale of merchandise, including vehicles, in the
state. Sales tax revenues are forecast by relating taxable sales to consumption of
taxable goods and business investment. Projected levels of sales tax revenue are much
higher than those at the 2021 Budget Act, with a significantly upgraded forecast for
both consumer spending and private investment. The state has benefited from
legislation passed in the wake of the U.S. Supreme Court's South Dakota vs. Wayfair,
Inc., decision which has allowed California to collect taxes on sales that have shifted
online.
This forecast reflects a temporary break from the long-term trend of the sales tax
declining as a share of personal income illustrated below. Taxable sales as a
percentage of personal income have declined from over 50 percent in the late 1970s
to 28 percent in 2019 as shown in the Taxable Sales as a Percentage of Personal
Income figure. The break from this trend is mainly the result of a spending shift from
services to taxable goods due to pandemic restrictions. However, the downward trend
is expected to continue in the long-term assuming spending patterns normalize and
shift back from goods to services.
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The State Sales Tax Revenue figure displays total sales tax revenues for the General
Fund and various special funds for 2020-21 through 2022-23.
The State and Local Sales Tax Rates figure displays the individual elements of the state
and local sales tax rates.
The Combined State and Local Sales and Use Tax Rates by County figure shows
combined state and local tax rates for each county, including special rates for certain
cities within those counties. The average statewide sales tax rate was 8.55 percent at
the beginning of 2021-22.
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Motor vehicle and parts dealers were the largest contributors to the sales tax base in
2020, accounting for 12.4 percent of taxable sales. Food service and drinking places
were the second largest contributor to the sales tax base with 9 percent of the total,
although this was down from 12.2 percent in 2019 due to the pandemic.
Since July 1, 2010, the General Fund portion of the sales tax no longer applies to
gasoline. Taxable sales, excluding gasoline, decreased by 1.3 percent in 2019-20. Based
on preliminary data, taxable sales increased by 13.3 percent in 2020-21 as the
economy, aided by government stimulus, rebounded strongly from the initial effects of
the pandemic. Taxable sales are estimated to increase by 7.6 percent in 2021-22 and
by 4.3 percent in 2022-23. Lower growth in 2021-22 and 2022-23 when compared to
2020-21 reflects spending shifting back from goods to services and the unwinding of
temporary federal stimulus. Federal stimulus measures have contributed to historically
high levels of household cash savings, which in turn have financed elevated levels of
spending. Spending growth is expected to slow as household cash savings are
depleted and return to pre-pandemic levels.
A General Fund sales tax exemption for manufacturing equipment commenced
July 1, 2014. The sales tax exemption applies to purchases of manufacturing or
biotechnology research and development equipment valued at up to $200 million in
qualifying purchases per business per year. The exemption was expanded beginning in
2018 to include manufacturing equipment used in electric power generation and
agricultural processing. The revenue loss from the utilization of this exemption was
$319 million in 2020-21 and is projected to be $354 million in 2021-22 and $393 million in
2022-23.
The Wayfair decision clarified states' authority to require out-of-state sellers to collect
use tax. Previously, California individuals were responsible for reporting and paying use
tax on out-of-state purchases. The California Department of Tax and Fee Administration
required out-of-state retailers to collect and remit use tax beginning on April 1, 2019, if in
the preceding or current calendar year their sales into California exceed $100,000 or
200 or more separate online transactions. Additionally, California passed the
Marketplace Facilitator Act, Chapter 5, Statutes of 2019, which raised the sales
threshold to $500,000, eliminated the 200-transaction test, and mandated that online
marketplace operators, as defined, collect and remit sales tax for all sales made on
their platforms beginning October 1, 2019. These policies helped capture much of the
shift to online transactions in the COVID-19 Pandemic. Taxable sales by non-store
retailers jumped from 2.8 percent, or $20 billion, in 2019 to 7.6 percent, or $55 billion, in
2020 due to Wayfair and the pandemic’s positive effect on the remote economy.
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CORPORATION TAX
The upgrade to the corporation tax revenue forecast is due primarily to improved
C-corporation profits, as large businesses that pay the significant majority of state
corporate taxes have in large part been able to adapt to the COVID-19 Pandemic.
C-Corporation taxable profits are projected to grow by 20.3 percent in 2021-22, up from
10 percent in the 2021 Budget Act. Beginning in 2022-23, C-Corporation taxable profits
are grown by adjusted nominal GDP, which is projected to be 7.9 percent in 2022 and
4.2 percent in 2023.
The forecast for S-corporation profits, which are taxed at a rate of 1.5 percent, was also
upgraded since the 2021 Budget Act. S-Corporation taxable profits are grown at the
same rate as California proprietorship income, which is projected to increase
7.4 percent in 2021-22 and 4.2 percent in 2022-23, faster than the 4.8 percent and
4 percent growth rates in 2021-22 and 2022-23, respectively, projected as of the 2021
Budget Act.
The corporation tax is estimated to generate $22.8 billion in 2020-21, $32.9 billion in
2021-22, and $23.7 billion in 2022-23. These figures reflect increases of $2.1 billion in
2020-21, $14.8 billion in 2021-22, and $6.4 billion in 2022-23 above 2021 Budget Act
projections. These figures reflect a revised scoring of the elective pass-through entity tax
enacted in the 2021 Budget Act that increases corporate income tax revenues by
$12.4 billion in 2021-22 and $9.4 billion in 2022-23. Absent this revised scoring, corporate
income tax revenues would have increased by $2.1 billion in 2020-21, increased by
$2.5 billion in 2021-22, and decreased by $2.6 billion in 2022-23. The decrease in 2022-23
is attributed to the Budget proposal to restore the temporary limitation on the use of
NOLs and business tax credits one year early, which decreases corporate tax revenues
by $5.2 billion in 2022-23. Corporation tax revenues are expected to contribute
12 percent of all General Fund revenues in 2022-23.
The policy proposals in the Budget, not including the adjustments to the elective
pass-through entity tax or restoration of NOLs and business tax credits, decrease
corporate income tax revenues by $65 million in 2021-22 and $342 million in 2022-23.
These policy proposals include conformity to federal tax treatment of certain federal
grants to California businesses and new tax credits to encourage research,
development, and implementation of climate solution technologies.
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INSURANCE TAX
Most insurance policies written in California are subject to a 2.35-percent gross
premiums tax. This tax takes the place of all other state and local taxes on insurance
companies except those on real property and motor vehicles. In general, the basis of
the tax is the amount of “gross premiums" received, less returned premiums. The
insurance tax generated revenues of $3.1 billion in 2020-21 and is expected to generate
revenues of $3.4 billion in 2021-22 and $3.5 billion in 2022-23. These figures reflect a
decrease of $209 million in 2020-21, an increase of $20 million in 2021-22, and a
decrease of $12 million in 2022-23 from 2021 Budget Act projections.
ALCOHOLIC BEVERAGE TAXES
In addition to the sales tax paid by retail purchasers, California levies an excise tax on
distributors of beer, wine, and distilled spirits. The tax rates per gallon are applied as
follows: (1) $0.20 for beer, dry wine, and sweet wine; (2) $0.30 for sparkling wine; and
(3) $3.30 for distilled spirits.
Revenue estimates for each type of alcoholic beverage are based on projections of
total per capita consumption and population growth. Per capita consumption of beer
and wine is projected to decline 1.2 percent in 2021-22 and 0.5 percent in 2022-23,
while per capita distilled spirits consumption is projected to increase 4 percent in
2021-22, before declining 2 percent in 2022-23. Revenues from this tax were $415 million
in 2020-21 and are estimated to be $423 million in 2021-22 and $421 million in 2022-23.
OTHER REVENUES
UNCLAIMED PROPERTY
The Budget reflects receipts in unclaimed property of $492 million in 2021-22 and
$506 million in 2022-23. These numbers reflect ongoing efforts to maintain compliance of
holders of unclaimed property with Unclaimed Property Law.
PROPERTY TAXES
Although the property tax is a local revenue source, the amount of property tax
generated each year has an increased impact on the state budget when Tests 2 or 3 of
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Proposition 98 are operative because, in those years, local property tax revenues
allocated to K-14 schools offset General Fund expenditures. When Test 1 of Proposition
98 is operative, as it will be for 2022-23, property tax revenues received by K-14 schools
count toward the Proposition 98 guarantee, but do not offset General Fund
expenditures.
Preliminary data for the secured property tax roll indicates that property tax collections
increased 5.3 percent in 2020-21, which is modestly below the average growth of the
prior five years of 5.9 percent but still in line with historical norms.
Assessed value growth is estimated based on statistical modeling and evaluations of
real estate trends. The median sales price of existing single-family homes increased
22 percent from 2019-20 to 2020-21. The sharp rise in home prices partly reflects a larger
than usual share of high-end homes sold as many wealthy households purchased a
larger home or second vacation home. Given the expectation of higher interest rates
as signaled by the Federal Reserve, and as the mix of homes sold reverts back to
pre-pandemic levels, housing price growth is expected to moderate to the
pre-pandemic rate of around 5 percent per year.
A property’s assessed (taxable) value generally increases more slowly than its market
value. When a property is sold, its assessed value is adjusted to its market value. As a
result, property sales often result in large increases in taxable value. Fewer properties
were transferred in 2020-21 than expected at the 2021 Budget Act, leading to fewer
taxable value reassessments. The forecast assumes transfers will continue to be slow in
2021-22 as demand softens due to decreasing housing affordability and increasing
interest rates. Following a brief rebound in 2022-23, the long-term trend of transfers
slowly declining is expected to continue.
Statewide property tax revenue growth rates are largely unchanged from the 2021
Budget Act as the lower transfers were offset by higher prices. Property Tax revenues
are estimated to increase 6.2 percent in 2021-22 and 6.1 percent in 2022-23, compared
to 6.1 percent for 2021-22 and 6.1 percent for 2022-23 projected as of the 2021 Budget
Act. Approximately 42 percent ($37 billion) of 2022-23 property tax revenues will go to
K-14 schools. This includes $2.9 billion that schools are expected to receive in 2022-23
pursuant to the dissolution of redevelopment agencies.
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SPECIAL FUND REVENUE
The California Constitution and state statutes specify into which funds certain revenues
must be deposited and how they are to be spent.
Total special fund revenues, excluding transfers, are estimated to be $63.9 billion in
2022-23. Motor vehicle fees and motor vehicle fuel taxes, which are discussed in the
next two sections, are expected to generate a combined $20.9 billion in revenue in
2022-23, comprising 32.7 percent of all special fund revenue.
MOTOR VEHICLE FEES
Motor vehicle fees consist of vehicle license, registration, weight, driver’s license, and
other charges related to vehicle operation. The Motor Vehicle Fees Special Fund
Revenue figure displays revenue from these sources from 2020-21 through 2022-23.
Motor vehicle fee revenues are affected by a number of factors, including the number
and types of vehicles in the state, the ages of those vehicles, and their most recent
sales prices. The total number of vehicles in California—automobiles, trucks, trailers, and
motorcycles, including vehicles registered in multiple states—is estimated to be
33.4 million in 2021-22 and 33.2 million in 2022-23. New vehicles registered in 2020-21
increased 9.9 percent from the prior year as vehicle sales rebounded from a sharp
decline in spring 2020 resulting from the COVID-19 Pandemic. The forecast projects that
global supply chain constraints will slow new vehicle sales in 2021-22, before rebounding
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in 2022-23 as the economic forecast reflects that supply chain constraints are gradually
resolved. As a result, new vehicle registrations are estimated to be 2.1 million in 2021-22
and 2.3 million in 2022-23. These levels are still modestly below the 2.3 million to
2.4 million new vehicle registrations seen from 2014-15 to 2018-19.
The Vehicle License Fee (VLF) is imposed on vehicles registered in California that travel
on public highways. The current VLF tax rate is 0.65 percent. A graduated fee of $28 to
$196 per vehicle, known as the Transportation Improvement Fee (TIF), is also applied.
These taxes are imposed in lieu of a local personal property tax on automobiles and are
administered by the Department of Motor Vehicles. VLF revenues are estimated to be
$3.1 billion in 2021-22 and $3.2 billion in 2022-23, while TIF revenues are estimated to be
$2 billion in 2021-22 and $2.1 billion in 2022-23.
Beginning April 1, 2017, the base vehicle registration fee of $43 increased by $10 and
was newly indexed to inflation. The total vehicle registration fee is expected to be $94 in
2022, which includes $62 for the base vehicle registration fee, $29 for a CHP fee that
continues to be indexed to inflation, and $3 for an alternative fuel/technology fee not
indexed for inflation.
Commercial and non-commercial truck owners also pay a fee based on vehicle
weight. Weight fee revenues are estimated to be $1.3 billion in both 2021-22 and
2022-23.
Beginning July 1, 2020, an additional inflation-adjusted $100 annual registration fee was
imposed on zero-emission vehicle renewals that are model 2020 or newer. Known as the
Road Improvement Fee, revenue is estimated to be $20 million in 2021-22 and
$38 million in 2022-23, and will be used to fund transportation projects.
MOTOR VEHICLE FUEL TAXES
The motor vehicle fuel tax (gas tax), diesel fuel tax, and use fuel tax are the major
sources of funds for maintaining, replacing, and constructing state highway and
transportation facilities. Over one-third of these revenues are apportioned to local
jurisdictions for a broad range of local road projects, including both maintenance of
existing roads and construction of new roads. In addition, some jurisdictions choose to
spend a portion of their allocation on improvements to the state highway system in their
region to decrease traffic congestion. Motor vehicle fuel tax collections are shown in
the Motor Vehicle Fuel Tax Revenue figure.
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Gasoline consumption was down 7.7 percent in 2020-21 compared to the prior fiscal
year. Gasoline demand was significantly reduced in the first half of the fiscal year by
stay-at-home orders related to the COVID-19 Pandemic. Gasoline consumption has
rebounded and is expected to increase by 11.8 percent in 2021-22 and 3 percent in
2022-23. In the long run, continued gains in the average fuel economy of cars and
trucks—achieved primarily through electric vehicle adoption—combined with the
state’s policies to reduce greenhouse gas emissions are expected to support long-term
declines in gasoline consumption. The forecast assumes gasoline consumption will not
return to its 2017-18 peak of 15.6 billion gallons. Diesel consumption increased by
4.6 percent in 2020-21 as the economy rebounded from the COVID-19 Pandemic and
demand for the shipping of goods increased. Because most diesel fuel is consumed by
the commercial trucking industry, consumption is generally affected most significantly
by general economic conditions. Because goods consumption is expected to remain
elevated, diesel consumption is expected to grow 3.6 percent in 2021-22 and
1.5 percent in 2022-23. Growth is expected to turn negative in the second half of the
decade, reflecting a moderating economy and gradually improving fuel economy.
The gas tax is collected from distributors when fuel is loaded into ground transportation
for transport to retail stations. This fuel is taxed at a rate of 51.1 cents per gallon in
2021-22 and the Budget proposes to pause the inflation adjustment scheduled for
July 1, 2022, and therefore the tax rate will continue to be 51.1 cents per gallon in
2022-23.
Distributors pay the diesel fuel tax, which applies to both pure diesel fuel and blends, at
the fuel terminal. The excise tax on diesel is 38.9 cents per gallon for 2021-22 and the
Budget proposes to pause the inflation adjustment scheduled for July 1, 2022, and
therefore the tax rate will continue to be 38.9 cents per gallon in 2022-23. Dyed diesel
fuel, which is used for off-highway purposes such as farm equipment, is not taxed.
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CANNABIS EXCISE TAXES
Proposition 64, also known as the Adult Use of Marijuana Act, levies excise taxes on the
cultivation and retail sale of both recreational and medical cannabis as of
January 1, 2018. The cultivation tax is paid on all recreational and medicinal cultivation
of cannabis, and was increased, to adjust for inflation, to $10.08 per ounce of flower,
$3.00 per ounce of trim, and $1.41 per ounce of fresh cannabis plant on
January 1, 2022. In addition, there is a 15‑percent tax on the retail price of cannabis.
Cannabis excise taxes generated $770 million in 2020-21 and are projected to generate
$711 million in 2021-22 and $787 million in 2022-23. The year-over-year decline in 2021-22
reflects tax data for the first quarter of 2021-22 indicating that consumption in the
quarter fell from the levels seen during all of 2020-21.
CIGARETTE TAX
The California Healthcare, Research and Prevention Tobacco Tax Act of 2016
(Proposition 56), passed by the voters in November 2016, increased the excise tax rate
on cigarettes, tobacco products, and electronic cigarettes. The excise tax increased
by $2 from 87 cents to $2.87 per pack of 20 cigarettes on distributors selling cigarettes in
California, effective April 1, 2017. The equivalent excise tax on the distribution of other
tobacco products such as cigars, chewing tobacco, pipe tobacco, and snuff also
increased by $2 from a $1.37-equivalent to a $3.37-equivalent tax, effective
July 1, 2017. Lastly, Proposition 56 newly imposes the $3.37-equivalent tobacco products
tax on electronic cigarettes. The $1.37-equivalent portion of that tax was imposed
beginning April 1, 2017, while the additional $2-equivalent tax was imposed beginning
July 1, 2017. The ad valorem excise tax rate on other tobacco products is calculated
annually by the California Department of Tax and Fee Administration based on the
wholesale price of cigarettes and the excise tax on cigarettes.
Chapter 489, Statutes of 2021 (SB 395), will implement an additional 12.5-percent retail
tax on the sale of electronic cigarettes and nicotine liquid, beginning July 1, 2022.
Revenues will be distributed to the Health Education Account of the Cigarette and
Tobacco Products Surtax Fund, the Proposition 56 Physicians and Dentist Loan
Repayment Program, the California Children and Families First Trust Fund, and other
health care programs. Total revenues are estimated to be $29 million in 2022-23.
Chapter 34, Statutes of 2020 (SB 793), would have banned all flavored tobacco
products, including mentholated cigarettes and flavored e-cigarette liquids, beginning
January 1, 2021. However, a referendum was submitted to the California Attorney
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General to overturn SB 793 and instead allow voters to decide on the flavor ban during
the next statewide election. The referendum was certified by the California Secretary of
State for the November 2022 election, until which time the flavor ban is suspended.
Current cigarette and tobacco revenue estimates assume that voters uphold the
legislation and the flavor ban goes into effect following the election.
Revenues from the tax on cigarettes and other tobacco products are distributed as
follows:
• Ten cents of the per-pack tax is allocated to the General Fund.
• Fifty cents of the per-pack tax, and an equivalent rate levied on non-cigarette
tobacco products, goes to the California Children and Families First Trust Fund for
distribution according to the provisions of Proposition 10 of 1998.
• Twenty-five cents of the per-pack tax, and a rate equivalent to 87 cents levied on
non-cigarette tobacco products and electronic cigarettes, is allocated to the
Cigarette and Tobacco Products Surtax Fund for distribution as determined by
Proposition 99 of 1988.
• Two cents of the per-pack tax is deposited into the Breast Cancer Fund.
• Two dollars of the per-pack tax, and an equivalent rate levied on non-cigarette
tobacco products and electronic cigarettes, goes to the California Healthcare,
Research and Prevention Tobacco Tax Act of 2016 Fund for distribution according
to the provisions of Proposition 56 of 2016.
Projections of cigarette tax revenues are based on projected per-capita consumption
of cigarettes, population growth, and the impact from the higher smoking age as well
as the increased prices due to Proposition 56. Revenue estimates for other tobacco
products, which now include electronic cigarettes, also reflect recent law changes. The
cumulative effect of product price and tax increases, the increasingly restrictive
environments for smokers, and anti-smoking campaigns (including state campaigns
funded by Proposition 99 Tobacco Tax and Health Protection Act revenues and
revenues from the Master Tobacco Settlement) have reduced cigarette consumption
considerably.
Annual per-capita consumption (based on population ages 18-64) was 184 packs in
1980-81, 123 packs in 1989-90, 84 packs in 1997-98, and 25 packs in 2020-21. Total
tax-paid packs of cigarettes sold in 2020-21 were 592 million. In 2021-22, tax-paid packs
of cigarettes sold are projected to decline to 573 million, followed by another decline
to 505 million of tax-paid packs in 2022-23. The larger decline in 2022-23 is due in large
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part to the assumed implementation of the statewide ban on menthol cigarettes. The
Tobacco Tax Revenue figure shows the distribution of tobacco tax revenues to the
General Fund and various special funds for 2020-21 through 2022-23.
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