California Sales Tax Collection Drops 40 Percent

Mike Shedlock
Posted: Aug 16, 2012 12:01 AM

On Tuesday we heard news that July retail sales rose, breaking a three-month downtrend.

Doug Short at advisor Perspectives has a great set of charts in his report Retail Sales: At Last, an Improvement!

Doug puts the improvement in proper perspective. However, my first thought in reading the report was "July sales will be likely revised lower".

Now I'm Wondering "What's Going on in California?"

My change in perspective come from looking at California State Finances for July 2012.

Compared to Budget

Total Revenues: -$475 million (-10.1%)
Income Tax: $12 million (0.4%)
Sales Tax: -$295 million (-33.5%)
Corporate Tax: $57.1 million (27.4%)

Compared to 2011

Total Revenues: -$468.8 million (-10%)
Income Tax: $156.2 million (5%)
Sales Tax: -$390.7 million (-40%)
Corporate Tax: -$26.4 million (-9.1%)

What the Numbers Tell Us

Typically, July is a month when California revenues go on vacation, as the month accounts for about one dollar of every $20 deposited in the General Fund. (Only October has lower revenue volume.)

Despite those low expectations, July’s revenues were $475 million, or 10.1%, below estimates.

Some of that variance may be due to timing, as a fund transfer expected in July will now be made in August (in the range of $100 million). Most of the shortfall was attributable to sales tax, which dropped $295 million, or 33.5%, below estimates.

Partially offsetting these revenue losses, the state’s other major revenue sources — income and cor-porate taxes — performed above estimates.

Corporate taxes rose $57.1 million (27.4%) above estimates. This reverses an eight-month trend of corporate tax revenue underperforming estimates. This could have been helped by a drop in corporate refunds in July, $54.6 million below July of last year.

Personal income taxes came in just above estimates by $12 million in July. The stability of this month’s personal income tax could be attributed to the modest recovery being made in the labor markets. California added 38,300 nonfarm payroll jobs in June, which followed a gain of 45,900 jobs in May.

July’s sales tax performance is harder to explain as it is unclear whether consumer activity has slowed or if this is an issue of timing. The missed amount this month can certainly be made up in the near future. While sales taxes were only projected to hit $882 million in July, the Budget expects the State to collect $2.3 billion in sales tax in August.

Total General Fund Disbursements also went out faster than originally projected. Table 2 shows Local Assistance payments in July totaling $1.7 billion over the budget’s estimates. Most of that was caused by a $1.5 billion school payment scheduled for September, but instead issued in July.

Sales taxes collections off 33.5% vs. budget and 40% from a year ago is not a "timing issue". Either California data is extremely messed up, or retail sales nationally will be revised sharply lower.

Syracuse New York Headed For Bankruptcy, 100% Certain

Without a doubt Syracuse, New York is headed for bankruptcy. Not only is there an "official denial" but the mayor of Syracuse is seeking legal guidance on municipal bankruptcy.

Once again, public union wages and benefits, especially police and firefighters' pensions are smack in the midst of it.

Please consider this news headline which I openly mock: Expert says bankruptcy for Syracuse is unlikely, but mayor should explore option

While the financial situation in the city of Syracuse hasn’t been described as desperate yet, Mayor Stephanie Miner has asked for some legal expertise on municipal bankruptcy.

The signs of the city’s financial problems have been evident for several years as city employees accept wage freezes and fire and police departments see staff reductions.

The city will use an early payment from Albany to help keep the budget from dipping into dwindling reserves. Skyrocketing pension and healthcare costs continue to be a problem for the city budget.

“Bankruptcy isn’t the answer. It’s not like we sort of restructure and become a different city,” said Professor of Economics and Senior Associate Dean, Maxwell School at Syracuse University Michael Wasylenko.

The mayor’s office says it is also learning about what a municipal bankruptcy would mean, following places like Stockton, Calif. who made that move.

The state has invoked a Financial Control Board before, currently in the city of Buffalo, twice previously in Yonkers, and once in New York City.

Mish Translation

  • Syracuse is doomed to bankruptcy
  • Skyrocketing pension and healthcare costs have sealed the city's fate.
  • Bankruptcy is the answer
  • There is no other means to rid the city of onerous public union wages and benefits

Professor of Economics and Senior Associate Dean, Maxwell School at Syracuse University Michael Wasylenko is so clueless that he deserved to be fired.

Unfortunately, I strongly suspect that union contracts prohibit that option. In the union world, tenure rules. Gross incompetency is simply not grounds for dismissal, pay cuts, or pension benefit reductions.

Mike "Mish" Shedlock