The State Spending Limit is Dead

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Once upon a time in California, voters decided that when state and local governments reaped big revenue windfalls strongly exceeding governments’ budgets, some of that excess should go back to hard working taxpayers. Voters passed a strong spending limit 40 years ago. Despite the Legislative Analyst’s Annual Fiscal Outlook Report that the state kitty should see an additional $7 billion–prompting some news reports to calculate the state could enjoy a massive $26 billion surplus next year–there was not a whisper about returning any money to taxpayers. 

That’s because the state spending limit is dead. 

You remember the spending limit, often referred to as the “Gann Limit” after its principal author Paul Gann, that applies to both the state and local governments? You don’t? Well, it hasn’t had much press lately. 

Voters in a 1979 special election overwhelmingly endorsed the spending limit for California governments. The idea of capping spending—with the implication that would control taxation—was so popular that even Democratic governor Jerry Brown embraced the idea. 

In his second inaugural address Brown declared, “I will support an appropriate constitutional amendment to limit state and local spending. Such measures are difficult to draft but are justified today in order to recapture a sense of the common interest as opposed to the narrow and special interests that combine to push spending beyond what is reasonable.” 

The measure passed with nearly 75% of the vote. 

In 1986, due to federal tax changes with which the state conformed, California found itself exceeding the limit and $1 billion was returned to taxpayers. That was too much for government and spending interests who began recalculating and amending the spending limit law. While the act is still on the books, it remains no more than a toothless old lion. 

According to Fred Silva, veteran budget analyst who once served as the fiscal advisor to the Senate President Pro Tem and currently is Director of Public Policy for California Forward, “The state came up with different solutions when tax revenue is exceeding general growth in the economy.” The reference to the state includes the voters who approved Proposition 2 in 2014 to establish mandatory budget reserves. 

The idea behind the spending limit was to keep taxes growing faster than the growth in personal income. The spending limit was constructed by establishing a base line, so in essence you got what you got the prior year plus growth in the economy. 

The adjustments to the spending limit were forced by a change in the economy and the tax system. Before the 1980s, Silva said, sales, income and property taxes grew relatively at the same pace and the tax system did not show great volatility. Inflation affecting the property tax changed that and the state came to rely more on the income tax. 

With California budgets hitting highs and lows in a rollercoaster fashion in the 1990s and 2000s, a major change to spending strategy occurred when Proposition 2 passed establishing a state rainy day fund. The plan was to capture excess revenue in good budget times to prepare for more difficult fiscal situations in down years. 

Proposition 2 effectively undermined one of the tenants of the spending limit—to return excess revenues to the taxpayers.

Silva said Prop 2 has been a more effective way to maintain the state’s fiscal health. He also suggested that since the rainy day fund and the spending limit are both in the state constitution they should be reconciled in some way. 

But then why bother—the spending limit is dead.

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