Just a year after Proposition 13 was passed in 1978, California voters approved another taxpayer rights initiative called Gann Spending Limit. Unlike Proposition 13, which was a direct limit on taxation, Gann was an attempt to limit government spending. It limited state and local government spending growth to a base year level adjusted annually to reflect increases in population and inflation.
Initially, the Gann limit worked as intended and resulted in a modest refund to taxpayers in 1987. But this success in limiting spending angered special interests that eat up taxpayers’ money. They rushed to support changes that weakened the Gann limit, particularly Proposition 98 in 1988 and Proposition 111 in 1990. These later measures provided exceptions for education and transportation expenses, respectively, as well than substituting a much more generous inflation factor.
Ironically, after Gann’s weakening, most public finance observers—including this author—erroneously assumed that California would never run into the limit again. How wrong?
Currently, large amounts of tax revenue from capital gains and stock options, coupled with low inflation (at least until recently) and stable population growth, have brought Gann’s problems to the fore. foreground. With a projected budget surplus of at least $97 billion for fiscal year 2022-23, California now faces a Gann problem that can no longer be ignored.
There are a few legal options available to political leaders to avoid having to return tens of billions to taxpayers, such as debt repayment. But these options to avoid Gann are not enough to prevent a Gann collision in the years to come, especially in 2024.
Given that the governor and legislative leaders agree that many billions of dollars must be returned to taxpayers, the question is how? It is strange that so many commentators on the current budget situation do not refer to the actual language of the California Constitution. For the funds to which taxpayers are entitled, they must be returned “through a review of tax rates or royalty schedules within the next two following fiscal years”.
Earlier this year, some discussions in Sacramento revolved around whether Covid-related stimulus checks for all Californians, or certain smaller demographic groups of citizens, would constitute a “return” to taxpayers in accordance with Gann. The answer is probably no. Direct checks from the Treasury are much more like “credits” than “review of tax rates or fee schedules”. So is Gov. Gavin Newsom’s plan in the May review to send rebate checks to owners of registered automobiles, though anyone is unlikely to challenge that mechanism in court.
Interestingly, the proposal put forward by Republicans in the California Legislature seems closest to the letter and spirit of the Constitution. What they are proposing is a real reduction in the gas tax rate. This requires no appropriation as the money will be “returned” via tax deferral each time a California driver fills up. Clearly, this plan is a “review of a tax rate”. This proposal has the added benefit of being more effective, less expensive to administer, and more likely to provide immediate relief to middle-class Californians.
We’ll learn more about Gann’s spending limit as the state budget deadline approaches. It is almost certain that some kind of return to taxpayers will be necessary. What is uncertain is whether the method of return chosen complies with the California Constitution.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.