Politicians don’t want to tell you, so we will: Tax revenues are coming back smartly now that the economy is growing. California recently discovered $2 billion in unexpected tax revenue, even as Governor Jerry Brown promotes a referendum to raise taxes. Connecticut has raised its revenue estimates by $465 million, even as Governor Dannel Malloy signed the largest tax increase in state history last week.
The revenue revival is also helping the federal fisc, with overall receipts rising by $110 billion, or 9.1%, in the first seven months of fiscal 2011. The biggest news is the increase in individual income tax receipts, which rose to $630 billion from $501 billion, or 25.9%, from October through April.
Taxes for social insurance—that is, payroll taxes—are down 6.1%, but that decline is smaller than expected given the one-year cut of two-percentage points in payroll tax rates that was part of December’s GOP-White House budget deal. More people are working, so more people are paying even at the lower tax rate. Corporate revenues are also up 4.3% along with business profits.
The bad news is that the federal deficit still rolled in at a record $871 billion, a $71 billion increase through April, because spending is up $181 billion, or 6.4% after adjusting for some one-time factors. Medicaid alone is up 6.7%.
One lesson here is that tax rates are plenty high enough to produce buckets of revenue as long as the economy is growing. Growth is crucial to deficit reduction. A second lesson is that the main budget problem continues to be spending. So bring on the debt limit debate—and impose firm caps on spending and debt.