State income tax revenues for January totaled $16.34 billion, which was $2.53 billion higher than expected.

By Kathleen Pender
Published: February 13, 2018
Updated: February 13, 2018 – 4:00pm

California’s tax revenues far exceeded expectations in January for the second consecutive month, but it remains to be seen how much of the excess reflects underlying strength in the economy, versus people speeding up their 2017 state income tax payments while they were still fully deductible on federal tax returns.

State income tax revenues for January totaled $16.3billion, which was $2.5 billion higher than was expected in its current forecast released in January.

Most of that came from personal income tax payments of $13.1 billion, which was $2.4 billion more than expected. The rest came from corporate income tax and sales and use taxes.

In December, total state income taxes came in a whopping $4 billion ahead of expectations, with $3.2 billion of that surprise coming from personal income taxes.

When the December numbers came in, the Legislative Analyst’s Office speculated that the positive 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.”

Starting this year, taxpayers who itemize on their federal returns can deduct a total of $10,000 in all state and local taxes (including income and property taxes) combined. Previously, this deduction was unlimited.

After the federal tax bill passed in mid-December, many Californians who exceeded that limit scrambled to pay the state income tax they expected to owe for 2017 by Dec. 31, so they could deduct all of it on their 2017 federal returns. (They also rushed to pay the second installment of their 2017-18 property tax bill normally due April 10, 2018.)

If they waited to pay these taxes until 2018, they would be subject to the $10,000 limit, even if they were for tax year 2017.

Normally taxpayers have until mid-January to make their last estimated state income tax payment for the previous year, and until mid-April to pay the remainder of their state income tax due for the previous year. That’s why California usually sees tax revenues spike in January and April.

After the December numbers came in so much higher than expected, the state lowered its expectations for January personal income tax revenues to $10.7 billion from $12.8 billion.

So the January number — $13.1 billion — was $2.4 billion ahead of revised expectations but only slightly ahead of the state’s previous assumption.

How much of the overage was prepayments, versus economic strength? The timing of when the taxes came in suggests a fair amount was prepayments.

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