The stock market and the economy are booming, but high-income earners in California paid less tax in June than analysts expected.
“What we have seen this year is puzzling," said Justin Garosi, an economist at the Legislative Analyst’s Office. “Normally if you’ve had the increases in stock prices we’ve seen you would expect to see a bigger increase in estimated payments.”
The state was expecting gross personal income tax collections would be up 8.1 percent (or about $555 million) compared to last June, yet as of June 20th collections were down 0.6 percent compared to last June. That's even though the S&P 500 stock index has risen 18% since last year.
"It’s a huge difference for the budget and it suggests people are sandbagging their estimated payments," said Garosi.
The Legislative Analyst’s Office suspects that people are deferring their taxes because they expect a tax cut is coming at the end of the year or next year from the Trump administration.
Though the early signs are troubling, since it's only halfway through the year, Garosi says we won't know until tax day what the true impact on the state budget will be.
"We have to wait for the other shoe to drop and it’s not going to drop until April 15th,” he said.
Unlike most tax filers who have taxes deducted out of every paycheck, wealthy people are required to make estimated payments during certain months, including June. Second-quarter estimated payments by high-income filers and business owners were due June 15.
Aaron Martinez, a master tax advisor at H&R Block in Beverly Hills, says he has not seen clients deferring because they do not meet the income requirements.
"In our office, most people are making less than $250,000 a year," he said.
But for tax filers with substantial capital gains taxes and deferred compensation, he said deferring taxes is a good strategy.
“That makes sense to me based on where the administration is headed in terms of taxation,” he said.
Though for now Trump’s tax proposal remains just that. Congress may not take up the complicated and politically sensitive overhaul of the tax code until the end of the year, at the earliest.
California is not the only state seeing less tax revenue than expected.
"States reported one possible driver of the declines in non-withholding personal income tax revenue could be taxpayers who shifted income to the 2017 tax year in anticipation of large federal tax cuts," stated a recent report from Fitch Ratings.