The Complex Spending Limit Was Flawed

Fred Silva
Director of Public Policy, California Forward

In his Friday column, “The Spending Limit is Dead,” Joel Fox is correct that the provisions of the 1979 measure designed to limit state spending simply do not function for the intended purpose of limiting state and local spending.  The idea was to create a spending limit line that only grew with cost of living and population and when tax revenues exceed that line taxpayers would get the “excess” back. Simple in theory but the flaws showed up almost immediately.

During the growth years in the 1980s that line grew at a rate faster than tax revenues so it had no effect on limiting spending. Then in 1986, federal tax changes brought in a “spike” in revenue with an average of $287 returned to taxpayers…and the limit line kept on growing.  As a recession hit in the early 1990s revenue dropped and the limit line kept on growing.

First, the fundamental flaw in the design is that it created a spending line that grew over time and with the rise and fall of the economy tax revenue generally stayed well below the line creating a growing gap between the maximum that could be spent and the revenue needed to meet the limit.

The design of the limit and deciding what spending was subject to the limit  became even more complex as time passed. In short, trying to match a somewhat arbitrary spending line with the complexities of state and local governments drove a succession of governors, legislators and fiscal analysts nuts. All one has to do is check the annual calculations done by the Department of Finance as part of the annual budget process to prove the point. You can find them in Schedules 12A through 12E: http://www.dof.ca.gov/Budget/Summary_Schedules_Charts/index.html:

Second, it was not designed to protect the state’s fiscal health. So spending continued to grow as revenues were sufficient to support the spending. The proponents of the spending limit assumed that public expenditures should grow by no more than population and inflation, an index not designed well for the state and local government sector of the economy.  The objective was to keep “spikes” in revenue out of baseline spending base so it would grow slower and any spikes in revenue could go back to taxpayers.

Even with the changes made in the spending limit in 1990 so that it followed the growth in the economy the gap between the spending limit line and the spending of tax revenue grew wider and today tax revenue is about $7 billion below the spending limit, even with the significant growth in revenue over the last 7 years.

As the gap grew after 1990, governors and legislatures spent the money that came into the state and remained under the limit, putting very little money into reserves to protect against economic downturns which occurred 3 times during that period bringing significant budget deficits, causing taxes to be raised and major programs reduced.

This technique of simply limiting spending has given way to a more effective means of maintaining a healthy fiscal condition.

Basically, the voters, in effect, replaced the spending limit model with a different approach. That approach was to focus on managing the state’s fiscal health by approving Proposition 2 that was on the 2014 ballot. It established a mandatory system for putting spikes in tax revenue as well as a small piece of on going revenue into reserves to help in economic downturns.

The important difference in the “spending limit” approach and the Prop 2 approach of capturing spikes in revenue for a rainy day is that it is designed to protect the state’s fiscal health so that it can survive an economic downturn and not to apply an artificial limit on state spending.

Using a limitation on spending was not a good mechanism for dealing with the tax burden since the overall tax system and its burden- who is paying and are we paying too much in taxes from the public service we all get – is a much more important issue and needs to be addressed rather then simply rebating taxes whenever an artificial spending limit is breached.

As Fox pointed out the spending limit still sits in Article XIIIB in the Constitution and since both Prop 2 constitutional amendments and XIIIB continue to operate some reconciliation should be attempted as some operative provisions are in conflict and at least in theory there is a circumstance under which the Budget Stabilization  Account in Prop. 2 is full and tax revenues exceed the spending limit. But, that is a discussion for another time.

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