The law and the Gann refunds

Just a year after Proposition 13’s passage in 1978, California voters approved another taxpayer rights initiative called the Gann Spending Limit. Unlike Proposition 13, which was a direct limit on taxation, Gann was an attempt to limit government spending. It limited the growth of state and local government expenditures to a base-year level adjusted annually to reflect increases in population and inflation.

Initially, the Gann Limit performed as designed and resulted in a modest rebate to taxpayers in 1987. But this success in limiting spending chafed the special interests that consume tax dollars. They rushed to support changes that weakened the Gann Limit, specifically Proposition 98 in 1988 and Proposition 111 in 1990. Those subsequent measures 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 — including this author — wrongly assumed that California would never again bump up against the limit. How wrong?

Currently, vast amounts of tax revenues from capital gains and stock options, coupled with low inflation (at least until recently) and flat population growth, have brought Gann issues to the forefront. With a projected budget surplus of at least $97 billion for fiscal year 2022-23, California is now confronted with a Gann issue that can no longer be ignored.

There are a few legal options available to political leaders to avoid having to return tens of billions back to taxpayers, such as paying down debt. But those options for Gann avoidance aren’t sufficient to prevent a Gann collision in the out years, especially 2024.

Given that both the Governor and legislative leaders concede that several billion dollars must be returned to taxpayers, the question is how? It’s odd that so many commentators on the current budget situation don’t refer to the actual language in the California Constitution. For those funds to which taxpayers are entitled, they must be returned “by a revision of tax rates or fee schedules within the next two subsequent fiscal years.” Cal.Const., Art. XIIIB, Section 2(a)(2).

Earlier this year, some discussions in Sacramento revolved around whether Covid-related stimulus checks to all Californians, or some smaller demographic of citizens, would constitute a “return” to taxpayers in compliance with Gann. The answer is probably not. Direct checks from the state treasury look far more like “appropriations” rather than a “revision of tax rates or fee schedules.” The same is true for Governor Newsom’s plan in the May Revision to send rebate checks to owners of registered automobiles, although it is unlikely that anyone would challenge that mechanism in court.

Interestingly, the proposal brought forth by Republicans in the California Legislature appears closest to the letter and spirit of the Constitution. What they propose is an actual rollback of the gas tax rate. This requires no appropriation as the money will be “returned” via tax deferment every time a California driver fills up their tank. Clearly, this plan is a “revision of a tax rate.” This proposal has the added benefit of being more efficient, less costly to administer, and more likely to provide immediate relief to middle class Californians.

We’ll be hearing more about the Gann Spending Limit as the state budget deadline approaches. That some sort of return to taxpayers will be required is a near certainty. What is not certain is whether the selected method of return complies with the California Constitution.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.