‘TEL’ me no lies

Beginning in the 1970s, voters across the United States began revolting against excessive taxation and, by way of direct democracy or heavy pressure on their respective state legislatures, they achieved some success by enacting new laws.

These laws aimed at enforcing fiscal restraint are sometimes referred to as TELs, or “tax and expenditure limitations.” According to the Tax Policy Center, as of 2020, 33 states had at least one kind of TEL.

TELs come in many forms. They include direct limitations on specific taxes, limitations on increases in government spending, vote threshold requirements or a combination of all three. It is no surprise that TELs imposed by voters directly, either through constitutional amendments or by statutory initiatives, are usually more restrictive than TELs enacted by legislative bodies.

Although America has always had laws limiting governments’ power to impose taxes, the sea change came in 1978 with the passage of California’s own Proposition 13. That set off a nationwide push for TELs.

Just one year after Proposition 13, California voters approved another TEL called the Gann Spending Limit. Its approach was very different from the direct tax limitations imposed by Prop. 13. The intent of the Gann Limit was to cap the growth of government spending, adjusted only for increases in population and inflation. It sought to accomplish this by establishing a spending limit based on 1978-79 spending, determining what appropriations would be subject to the limit, estimating “proceeds of taxes” from all state sources, and then subtracting certain exclusions.

Yes, it’s complicated. And it doesn’t get any less complicated when one considers that the Gann spending limit was substantially weakened by Proposition 98 in 1988 and Proposition 111 in 1990, which carved out exceptions for education and transportation spending, respectively, as well as substituting a far more generous inflation factor. Ironically, after Gann was weakened, most public finance observers assumed that California would never bump up against the limit again. We assumed incorrectly.

Currently, vast amounts of tax revenues from capital gains and stock options, coupled with minuscule inflation and flat population growth, have brought Gann issues unexpectedly to the forefront. Dozens of media reports last week speculated about the Gann limit’s influence on Gov. Gavin Newsom’s decision to return billions of dollars to taxpayers who earn up to $75,000 as part of state’s post-COVID stimulus plan.

But voters should not confuse the propriety of the governor’s stimulus plan with the issue of whether those disbursements are an attempt to “comply” with Gann. We won’t be able to make a determination as to the latter until we see actual budget proposals, including the annual Gann Limit calculation from the Department of Finance.

As to the former, it is important to keep in mind that all of this excess revenue is due to what taxpayers have produced rather than any managerial wisdom from the governor. So while Newsom breaks his arm trying to pat himself on the back for returning money to citizens, let’s remember that government didn’t create this pot of money — taxpayers did.

Moreover, all that excess revenue may, in part, be due to a strong economy in California, but it is also the result of our excessive tax burden.  One way the state can avoid Gann issues next year and in all future years is to reduce tax rates across the board. But in the meantime, we can conclude that when it comes to restraining government spending, Howard Jarvis was correct when he said, “Don’t give them the money in the first place.”

Jon Coupal is president of the Howard Jarvis Taxpayers Association.