IPOs and stock market swell California state coffers

California’s revenues surged to $19 billion in April, 27% higher than anticipated, making up for a shortfall experienced earlier in the year.

Gov. Gavin Newsom's January budget proposal had anticipated $15 billion in revenues for April.

Bloomberg News

The state’s revenues were off in December and January, putting the state more than $2.3 billion shy of expectations set in the January budget.

State officials surmised at the time that the shortfall was a short-term effect of the 2017 law that put a cap on the state and local tax deduction.

Analysts are tracking a similar surge in April revenues in other states heavily dependent on income taxes such as New York, New Jersey and Massachusetts.

"Personal income taxes account for 70% of California's general fund, so growth in the revenue stream is key to the state's fiscal performance," senior analyst Matthew Butler wrote in a May 2 Moody’s Investors Service report.

It wasn’t just changes in federal tax laws that affected personal income tax collections. A historically high number of initial public offerings by California-based companies and capital gains growth were also factors, according to analysts.

“A typical IPO year for California-based companies is roughly $30 billion of market capitalization,” Carolyn Chu, a deputy legislative analyst in California’s Legislative Analyst’s Office, wrote in a May 12 report. “So far this year, California-based company IPOs have had almost $150 billion of market capitalization, $82 billion of which was from the recent Uber IPO.”

While IPOs can ultimately increase capital gains, the primary observable effect of IPOs is in withholding, Chu wrote. The state receives withholding from newly public companies due to the vesting of California-based employees’ restricted stock units, which become taxable at the offering, she wrote.

The capital gains boost analysts are citing resulted from a “stronger equities market over the past couple of months that may have also provided a bump in states’ April income tax collections,” Butler wrote. “A large portion of non-wage income comes from capital gains and many households may have cashed in investments as the stock market improved, boosting their April quarterly payment.”

Corporate income tax collections at $3.4 billion also came in 30% higher than the $2.4 billion anticipated in the governor’s revised forecast, according to the controller’s monthly cash report.