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By Jon Coupal
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.
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