New state finance data show California income tax withholdings remain stable amid projections of an overall decline in sales, corporate and overall income tax revenue.
Steady income tax withholding on wages indicates overall baseline economic activity could remain neutral despite declining consumer sentiment and growing economic uncertainty.
“Monthly personal income tax (PIT) withholding for May came in $27 million (less than 1 percent) below projections included in the 2025-26 May Revision Budget. This amounts to 3.3 percent growth above the prior year level,” wrote the state-funded Legislative Analyst’s Office in a new report. “The trailing 12-month total of income tax withholding had been trending up between 5 percent and 10 percent most of the fiscal year. This growth ticked up to around 10 percent in January. Since the winter, however, monthly withholding totals for March, April, and May have cooled, leading the 12-month total growth to moderate around 7 percent as of May.”
The stability of income tax withholdings could support the legislature’s ability to offset expected decreases in federal funding from the current budget reconciliation bill facing Congress, which The Center Square estimated could cost California up to nearly $40 billion per year. California relies on federal funding for about a third of the state’s spending, with federal funding earlier estimated to provide $170.6 billion, while the state is considering a $322 billion budget.
The LAO’s May 9 “Big Three” revenue outlook, covering corporate, sales and overall personal income taxes, projected revenue to be nearly flat or slightly lower than Gov. Gavin Newsom’s projections. That report said the state’s path to revenue growth is narrow amid an economy that has been “stagnant for some time.”
“Typically, income tax collections like we have seen recently would suggest a positive revenue outlook. Our current forecast, however, is dampened by several factors. Some of these factors, such as the state’s stagnant economy and the stock market’s questionable sustainability, are issues we have raised previously but about which we remain concerned,” wrote the LAO. “Other factors, such as potential impacts of expanded tariffs, are new developments that add strain to an already tenuous situation.”
The report focused on “declining consumer sentiment,” “downgraded expectations among economic forecasters,” and reliance on the stock market for propping up income tax collections as a “precarious basis for revenue growth” amid recent stock gains that “may not be sustainable.”
However, with income tax withholdings representing baseline employment continuing to grow, some of these concerns may be allayed, providing more leeway for the legislature to buttress the state’s financial situation.
The LAO announced at the end of May that the state is likely to experience annual budget deficits in the $10 billion to $20 billion range for the coming years, suggesting even with a stable economy the state will need to secure new revenue or cut existing programs to fit existing revenue.
