Governor Gavin Newsom recently released an updated state budget with a record amount of cash. Topping $300 billion with a surplus of nearly $100 billion, this is the second year the state is facing a substantial surplus fueled largely by income tax revenue from top earners. The good news is we have a progressive tax revenue system — the first step to spreading the wealth. The bad news is we have a decades-old law that limits government spending, such as for social safety net programs and essential services like transit, housing, and health care. This dated, regressive policy restricts the ways we can support low- and middle-income residents.
This law, dubbed the Gann Limit, restricts a portion of spending largely for education, infrastructure, or cash rebates. You may remember the “Golden State Stimulus” last year, when the governor issued tax rebates under the pandemic emergency order to those earning less than $75,000 annually; that was to avoid surpassing the Gann Limit.
This year, the Governor has proposed an inflation package that includes sending up to $800 in rebates to vehicle owners, $750 million in grants to transit agencies to provide free transit for three months, and additional funding for active transportation infrastructure like bike lanes and sidewalks. You can read more about our take on the inflation package here.
What is the Gann Limit?
Passed in 1979, the Gann Limit (aka State Appropriations Limit, SAL, or Proposition 4) capped per capita tax revenue spending at 1979 levels and required the excess be distributed to tax payers in a rebate. In 1988, voters amended the constitutional regulations to be adjusted for inflation, calculated over a two-year period, and significantly changed how the excess money could be distributed (outlined in the bullets below). It’s not often that the Gann Limit is exceeded, however this is the second year in a row the budget will be operating within these boundaries — highlighting the deep, growing income inequality in the state.
We’ve come a long way with essential services like public housing and transportation funding. The state provides much more support to residents today than in 1978 when the Gann Limit passed. Now, when the state is flush with cash, this archaic law limits our ability to increase funding for programs that support Californians who need it most.
There are limited options for what the governor can do with the excess cash, determined by amendments passed in the late 1980s:
Issue tax refunds
Allocate excess revenues to schools
Increase spending on specific items that were deemed excluded from the Gann Limit in the amendments such as:
Distributions to local government general funds with no required purpose for use
An infrastructure project that costs at least $100,000: funding for a “fixed asset (including land and construction) with a useful life of 10 or more years”
Emergency spending (the COVID emergency order, for example)
Pay off any fees or mandates imposed by the courts or federal government
Pay off existing debt
The Gann Limit has never been tested in court, so the language written in 1988 defining these exclusions is all we have to guide usage. Furthermore, the last time we were in this scenario before last year was 1987. This gives the government little room for creativity in interpreting the exclusions, or basis to expand them.
Why is it called the Gann Limit?
The Gann Limit is named after Paul Gann; a conservative, anti-tax crusader, most notably known for being a co-author on Proposition 13 alongside Howard Jarvis. The two campaigned for Prop. 13 across the state promising homeowners relief of rising property taxes. They succeeded, limiting the amount at which property taxes can rise annually regardless of home value. This law disproportionately benefited white homeowners and continues to further racial and economic inequality in the state today.
These tax cuts and caps on government spending, in simplest terms, benefit the rich and harm the poor. Prop. 13 limits the money going into government coffers that should be spent on schools and the social safety net. Proposition 4, although less insidious, limits government spending and government’s ability to fund all programs that support Californians in need. While we certainly support the use of state revenue to fund public education, tax revenue collected from unprecedented capital gains during the pandemic are needed to address the multitude of crises that we face such as homelessness, climate change, and zero-emission mobility. What’s more, the proposition was passed during an election with one of the lowest voter turnouts in history.
Why do we keep exceeding the Gann Limit now?
The state budget surplus comes into play when the state’s income exceeds expenditures — and expenditures are limited by the Gann Limit
We’re approaching record surpluses for a few reasons:
A significant growth in personal income. The state’s largest revenue source (the personal income tax) has ballooned in the pandemic and this was predominantly high-income earners.
When the top one percent of earners in the state are doing well, the state’s income soars, because these earners pay about half the state’s income tax.
Record consumer spending in early 2021, likely due to federal and state stimulus checks, increased the sales tax revenue.
It would be remiss not to address how disheartening this is in a state with a worsening income divide, a housing crisis, and astronomical cost of living. Alongside the reality of homelessness, hunger, and reduced mobility, our state’s economy continues to soar driven by the incomes of the top earners. Our progressive tax system is working, collecting astronomical revenues during this time of exceeding income inequality, but the Gann Limit is preventing the state from using those dollars to make change.
What’s next for the Gann Limit?
There are rumblings of reform for this antiquated law. Governor Newsom and the Senate have said it’s time to bring the Proposition back to voters to pass amendments that would allow the budget to better serve Californians. The chances to make any changes that impact this year’s budget have passed, but it’s something we need to prioritize for building a better future for California with robust essential services and a social safety net. And this problem isn’t going away. According to the state financial analysts, we’re expected to exceed the Gann Limit for years to come, if we don’t reform it first.