Good news revenue outlook for 2018-19
(Calif.) After more than a year of delay, Wall Street profit taking from the so-called Trump-bump will start to trickle into state coffers toward the end of this year and over much of fiscal year 2017-18, according to a report released Wednesday from the nonpartisan Legislative Analyst.
As part of the LAO’s annual outlook on the California economy, revenue increases next year will boost the Proposition 98 guarantee to schools by $2.6 billion over existing estimates—but it could be more.
“The scenario we’ve put together represents a good one, but it’s not the best-case scenario either,” said Ken Kapphahn, senior fiscal and policy analyst at the LAO. “There could be even more money out there that we have not anticipated in our forecast. This is what we consider to be the most likely scenario, but it is neither the best nor the worst.”
While the LAO recognizes some potential threats to the California economy, and therefore the state budget too, the near-term outlook remains upbeat.
Job growth, which had been on a tear, has already begun to slow, but expectations are that employers will continue to add thousands of new jobs through the 2018-19 fiscal year. At the same time, wages are likely to trend upward as the labor pool tightens.
Meanwhile, the bull market in stocks is likely to cool off next year with the Standard & Poor’s Index falling by perhaps 100 points by June, 2019.
The LAO’s prognosis gives some chance for a moderate recession in California starting in the late summer of 2019, which is one reason the Legislature’s primary fiscal adviser is offering some caution.
Assuming no new spending programs are added next year, the state would end 2018-19 with $19.3 billion in total reserves. Taken another way, lawmakers will have about $7.5 billion in discretionary spending next year.
The news is good for schools. The LAO expects that the Proposition 98 guarantee for this budget year, 2017-18, will end up about $651 million from the estimates that the Brown administration and legislative leaders agreed upon in last summer’s budget negotiations.
Even better, however, is that in 2018-19 there will be another jump of 3.4 percent over existing projections or $2.6 billion.
There is reason to think that revenues might climb even higher next year, whether or not Congress and the Trump administration come to an agreement on a new tax structure.
Since Donald Trump’s election as president a year ago, the S&P 500 has risen more than 350 points. State fiscal analysts, including those at the LAO, have anticipated that profit-taking by big investors would eventually result in a big run-up in capital gains taxes paid to the state.
Most of those profits remain unrealized as investors have waited for an agreement between Republican Congressional leaders and the White House. While both the Senate and the House have a version of a tax overhaul that the president generally supports, the profit-taking is likely to begin in earnest later this year.
“Our outlook is that the state starts to benefit from that beginning in December,” said Kapphahn, who noted that the overall gains to the state coffers next year will not be exclusively the result of capital gains.
“There has been strong growth in personal incomes, in wages, we have employment growing—not as fast as the last two years, but still positive,” he explained. “So all of that in combination with the revenue from the stock market is what leads us to identify the increases in both 2017-18 and 2018-19.”