Good morning,
California’s September 2025 state revenue collections significantly exceeded budget expectations, suggesting ongoing economic resilience but also raising longer-term questions about the sustainability of current growth trends.
September Collections Surpass Estimates by $2.3 Billion
Preliminary data show that total personal and corporate income tax payments to the state treasury came in 16% ($2.3 billion) above September’s budget estimate. Nearly all of that gain was driven by personal income tax (PIT) withholding, which was $926 million (12%) above projections and up an “astonishing”19% year over year, according to the Legislative Analyst’s Office (LAO).
Other areas of strength included:
- Quarterly estimated PIT payments: $1.2 billion above projection (44%)
- Pass-through entity corporation taxes: $446 million above estimate (103%).
- Final PIT return payments: $195 million above estimate (53%).
The lone shortfall came from quarterly estimated corporation taxes, which fell $541 million (20%) below projections. Current estimates do not yet include September’s sales tax or other miscellaneous revenues.
Year-to-Date Revenues Now $3.5 Billion Above Budget
Including September’s strong results, California’s 2025–26 fiscal year-to-date PIT and CT receipts are now $3.5 billion (11%) ahead of projections. Roughly 60% of this year-to-date gain stems from withholdings, indicating strength in high-income wage sectors and ongoing capital market activity.
Cash Balances at Record Levels
The State Controller’s Office reports that the General Fund cash balance stood at $22 billion at the end of September—12% above expectations—and backed by an additional $85 billion in borrowable resources held in special funds and reserves. California’s treasury has not required short-term borrowing since 2014 and currently maintains cash reserves nearly 43 times larger than the state’s historic $2.5 billion threshold for liquidity. The pooled investment account is averaging a 4.2% monthly yield with an average maturity of 248 days.
Budget Outlook: Strength with Structural Fragility
Despite the near-term strength, the state’s budget outlook remains fragile. Analysts caution that much of the recent revenue boom appears tied to AI-related investment activity, which could reverse if equity valuations correct. The state continues to face projected structural deficits extending over multiple years, even before accounting for the sunset of Proposition 30/55 high-income tax rates in 2030 or potential revenue impacts from AB 1207 (cap-and-trade extension) and the federal H.R. 1 tax changes enacted in July.
Most of the rainy day reserve has already been used to balance recent budgets, and large cash balances cannot be easily repurposed for structural deficit reduction. Updated fiscal forecasts will be released by the LAO in mid-November and the Department of Finance by January 10.
Next Up: October Receipts
October collections will provide the next key indicator, particularly with delayed Los Angeles County taxpayer filings due October 15 following this year’s wildfire disaster extensions. These payments historically represent a major month for personal and business income tax receipts.
We will continue monitoring developments and provide new analysis once updated LAO and Department of Finance forecasts are released. Should you have any questions in this regard, please don’t hesitate to reach out.
Thank you,
Mark
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MARK SMITH
Smith Policy Group
1001 K Street, 6th Floor
Sacramento, CA 95814
(916) 335-5072
mark@smithpolicygroup.com
smithpolicygroup.com