Strong corporate and income tax payments put the state $5.5 billion ahead of budget projections since April, even as the Legislature’s fiscal adviser cautions that the gains rest heavily on a stock market buoyed by artificial intelligence.
By Staff Reporter
California collected $2.9 billion more in general fund revenue in September than the state budget anticipated, according to the Department of Finance’s October Finance Bulletin, the latest in a run of monthly reports showing tax receipts outpacing projections.
Preliminary agency cash receipts for the month totaled about $22.6 billion, compared with a forecast of $19.7 billion, an overage of 14.9 percent, the department reported. Corporation tax receipts came in $1.3 billion, or 49.1 percent, above forecast, and personal income tax receipts were $1.1 billion, or 8.5 percent, higher than expected.
Gov. Gavin Newsom’s office announced the figures on Tuesday, pairing them with a list of nine California start-ups recently valued at more than $1 billion. “As our economy continues to grow and our revenues show everyone what’s possible – we will keep betting on the future being built right here,” Mr. Newsom said in the release.
Where the money came from
The September surplus was concentrated in estimated tax payments, which are made quarterly by businesses and by individuals with significant income outside regular paychecks, such as capital gains. Estimated personal income tax payments ran $939 million above forecast, while withholding from wages was $272 million higher, according to the bulletin. Although California does not require a September estimated payment, the department noted, many taxpayers pay on the federal deadline of Sept. 15.
On the corporate side, estimated payments were $658 million above forecast, and refunds were $460 million lower than projected. Sales and use tax receipts were $159 million, or 5.6 percent, higher than expected.
Interest earned on the state’s pooled money investments was $384 million above forecast for the month, which the department said made up for timing problems that had produced shortfalls in July and August.
Cumulatively, since the budget forecast was completed in April, preliminary general fund cash receipts have come in $5.5 billion above projections, including $828 million attributed to the 2025-26 fiscal year. For the first three months of the current fiscal year, receipts total about $50 billion, $4.7 billion more than forecast.
A broader economic picture
The bulletin also reported that California’s real gross domestic product grew at a 2.5 percent annualized rate in the second quarter, ahead of the 2.2 percent national rate, with the information sector contributing the largest share. Personal income in the state rose 4.5 percent from a year earlier, slightly above the national figure of 4.4 percent.
Housing permits were another bright spot. Through August, California permitted housing at an annualized rate of 113,300 units, up 15.5 percent from the same period last year, driven by a 37.3 percent increase in multifamily permits. Single-family permits were down slightly.
The national labor market was weaker. The U.S. economy added 29,000 jobs in September, according to the bulletin, and job gains for July and August were revised down substantially. The governor’s office said California’s unemployment rate held at 5.1 percent in September, still above the 4.2 percent national rate the department cited.
The warning from the Legislative Analyst
The strong receipts arrive against a backdrop of persistent concern about the state’s long-term finances. In its May assessment of the governor’s revised budget, the nonpartisan Legislative Analyst’s Office wrote that, despite the revenue boom, “the state now faces a structural budget imbalance—meaning ongoing revenues are insufficient to support ongoing expenditures.”
The analyst’s office said the administration’s own figures showed a structural deficit of $14 billion in 2026-27, and that even after the May Revision cut projected future shortfalls roughly in half, deficits of about $10 billion a year remained. It noted that the May Revision relied on roughly $20 billion in reserve withdrawals and suspended deposits, along with $4 billion in new borrowing.
The office also warned that the revenue base was unusually exposed to financial markets. It wrote that “a revenue shock could be coming, as the state’s revenue outlook rests disproportionately on AI-driven equity valuations that are trading at highs last seen at the peak of the dot-com bubble,” adding that a repeat of the dot-com bust could open a revenue hole of $100 billion.
That concern is visible in September’s numbers. Estimated payments, which track capital gains and business profits more closely than wages do, accounted for most of the month’s overage, the same category of revenue that tends to fall fastest when markets decline.
What it means for the next governor
The September report is one of the last monthly updates before the Legislative Analyst’s Office releases its annual fiscal outlook, which it typically publishes in November, and before the administration drafts the 2027-28 budget proposal due in January.
That proposal will be prepared during a transition. Mr. Newsom, who is term-limited, leaves office in January, and voters will choose his successor on Nov. 3. Whoever wins will inherit both the stronger-than-expected receipts and the structural gap the analyst’s office described.
For the Bay Area, where technology companies and their employees supply a large share of personal income and corporate tax payments, the trend cuts both ways. The region’s concentration of artificial intelligence and semiconductor firms is helping drive the revenue gains, and the governor’s office noted that some of the newly minted billion-dollar start-ups are based in San Francisco, San Jose and Sunnyvale. The same concentration means that a sustained downturn in technology stocks would be felt first in the region and in Sacramento’s budget.
The department cautioned that its figures are preliminary agency cash reports and may differ from those reported by the state controller.
