This month, California Gov. Gavin Newsom announced that many Californians will soon receive some tax relief. Specifically, Newsom has promised $600 tax rebates to those earning $30,000 to $75,000. Additionally, households making up to $75,000 with at least one child will receive an extra $500 payment.
Facing a tough recall election this fall, Newsom is certainly eager to use some of the Golden State’s $75 billion surplus to issue rebates to California’s taxpayers. However, the credit for these tax rebates belongs not to Newsom but to the “Gann limit”: a fiscal limit enacted in 1979.
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During the late 1970s, California was the epicenter of a nationwide tax revolt. In 1978, Californians passed Proposition 13, which both cut and capped property taxes. However, Paul Gann, one of the authors of Proposition 13, also sought to limit the overall size of government. So in 1979, he placed the Gann limit on the ballot, which originally limited the growth of tax revenue appropriations to the inflation rate plus population growth. Importantly, the Gann limit also mandates tax relief when the spending limit is exceeded. On Nov. 6, 1979, the Gann limit was approved by a whopping 74% of California voters.
Admittedly, the Gann limit had some flaws. It only limited appropriations of tax revenue and, as a result, the Legislature responded by raising more revenue from non‐tax sources. Still, the Gann limit proved to be relatively effective at limiting spending growth during the 1980s. From 1980 to 1991, California’s rank in-state per‐capita expenditures fell from 7th to 16th. Its rank in per‐capita revenues showed a similar decline during the same period. Furthermore, when tax receipts exceeded the Gann limit in 1987, the state refunded $1.1 billion in surplus revenues to taxpayers.
However, the 1987 tax rebate led to the weakening of the Gann limit. The rebate upset education interests who wanted to use part of the surplus to increase K-12 school spending. California’s education lobby responded in 1988 by supporting Proposition 98, which required that public schools receive a share of any revenues that exceeded the Gann limit. Perhaps more importantly, Proposition 98 mandated an annual increase in K-12 education spending in California, even when revenues declined.
These increases in K-12 education spending came at the expense of other programs and generated hostility toward the Gann limit. As a result, the transportation lobby in 1990 was able to enact Proposition 111, which exempted gasoline taxes from the Gann limit. More importantly, Proposition 111 raised the Gann limit by tethering it to per‐capita personal income growth instead of inflation plus population growth. Ever since, the Gann limit has largely ceased to be a meaningful constraint on government growth in the Golden State. In fact, the Gann limit was powerless to halt the significant spending increases during the Gray Davis administration in the late 1990s and early 2000s.
However, the soaring stock market and influx of federal COVID-19 relief funds have pushed state revenues over the Gann limit. That is why Newsom is required to provide tax relief to California taxpayers. Now, there is much to criticize about Newsom’s tax relief plan. When revenues exceed the limit, the Gann limit requires that governments “adjust tax rates or fee schedules.” It is not clear that targeted rebates are consistent with either the spirit or the letter of the Gann limit. In general, fiscal conservatives would prefer the surplus provides either tax rate reductions or a tax relief plan that benefits all Californians.
That said, these forthcoming tax rebates will increase the visibility of the Gann limit. They might generate interest in stronger fiscal limits in California and elsewhere. Indeed, the history of the Gann limit teaches valuable lessons about the importance of effective fiscal institutions. The weakening of the Gann limit in the late 1980s and early 1990s led to sharp spending increases, large deficits, and higher taxes.
The long-term restoration of California’s economy will be a salient issue during the recall election, so the Republican gubernatorial candidates should propose strengthening the Gann limit. After all, tax relief need not be a once-in-a-generation occurrence for Golden State taxpayers.
Michael J. New (@Michael_J_New) is a research associate at the Busch School of Business at The Catholic University of America and policy adviser for The Heartland Institute.
