Capitol Alert

Tax rebates for Californians? It’s a distant possibility amid budget dispute

California taxpayers could be in line for their first budget rebate checks in three decades under a vestige of the state’s nationally watched “taxpayer revolt” in the late 1970s.

But a lot stands in the way of that happening – notably Gov. Jerry Brown and his administration’s reading of the so-called Gann Limit, named after tax watchdog Paul Gann, the late sponsor of the 1979 ballot measure meant to restrict government spending.

Subsequent voter-approved changes to the limit have made it a fiscal afterthought for the past quarter-century. Yet a recent report by the nonpartisan Legislative Analyst’s Office contained breaking news in the complex world of government budgets: Brown’s January proposed budget wrongly excludes $22 billion from total spending subject to the limit, and after accounting for the money, state government is as close as it’s been in decades to exceeding the threshold.

The report creates the prospect of upended spending priorities or even the first taxpayer rebates in 30 years.

And if lawmakers stick with the governor’s methodology, the state would be “highly vulnerable” to a lawsuit, in the analyst’s view.

The report adds another element of uncertainty to this year’s annual budget process. Brown and others have warned that a downturn is inevitable after more than 90 months of economic growth. In Washington, D.C., President Donald Trump and Republican leaders in Congress champion policies that could mean billions of dollars in federal cuts to California’s budget, particularly health care.

Fred Silva, a former legislative budget staff member who worked extensively on spending-limit issues before and after Proposition 4’s approval, called the analyst’s conclusions “dead right.”

The analyst referred to the $22 billion as “nowhere money,” saying Brown’s administration did not account for it under either local or state limits, and said the administration’s approach “violates the spirit of Proposition 4.”

“... You have to account for it. There’s no ability to have ‘nowhere money,’ ” said Silva, the senior fiscal policy adviser for California Forward, a nonprofit focused on improving state government.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, said the report caught him by surprise. “A lot of us had assumed, incorrectly, that the Gann Limit was dead,” said Coupal, who worked with Gann. The namesake of Coupal’s organization was a close Gann ally.

The Brown administration said it stands by its spending limit methodology.

“It’s not our business to divine the spirit of the Gann Limit,” said H.D. Palmer of the state Department of Finance. “The governor’s budget reflects an accurate implementation of both the Constitution and state laws regarding the Gann Limit.”

Proposition 4 came a year after its far better-known predecessor, Proposition 13, which capped the growth in property taxes on residential and commercial property. The 1979 measure had an equally ambitious goal: to keep state per capita spending at 1978-79 levels after adjusting for inflation and population growth.

“Take a bureaucrat to lunch. Tell him you’re tired of wasteful government spending. Tell him you’ll no longer tolerate fat treasury surpluses and excessive taxes,” the narrator in a Yes-on-4 TV ad said as a rotund gentleman savored a large drumstick.

Brown was early into his second term as his office and the Legislature began to carry out the change. In the mid-1980s, changes in federal tax law created a spike in state revenue. That required the state to issue $1.1 billion in tax rebates – about $2 billion in today’s dollars – to stay under the limit.

Since then, a pair of ballot measures have reduced the limit’s relevance.

Proposition 98 in 1988 required that half of any revenue above the limit go to schools. Two years later, Proposition 111 made more changes, such as setting the appropriations limit as the average of two years of revenue instead of just one.

Brown’s January plan contains no discussion of the Gann Limit. But the analyst’s office, in its review of the plan, concluded that Brown’s proposal adopted a new Gann Limit methodology that did not count $22 billion in school-related spending.

The governor’s proposal, the analyst’s office wrote, “contradicts long-standing policies regarding the implementation of the Gann Limit.”

Under its analysis, the analyst estimated that the state will have just $2.8 billion in room under the limit in the next year, not the $24.8 billion listed by the administration. If estimated revenue increases, then the state would be above the limit. In addition, proposed changes in federal tax policy could lead to the the same type of state revenue spike as 30 years ago, Silva said.

The issue also has implications for negotiations on a road funding package.

Brown’s budget treats a proposed $65 “road improvement charge” as a fee excluded from the limit. The analyst, though, said the charge likely qualifies as a tax and the $1.1 billion in estimated revenue would fall under the limit.

In any limit-exceeding scenario, lawmakers would have options. They could do nothing, and any excess money would flow to schools and taxpayers. They could also shift spending to limit-exempt purposes, such as debt service and certain public-works projects.

Coupal said he would be open to any of those options but expects it would ultimately be up to a judge. He and others will look closely at the budget lawmakers pass in June, he added.

“If we believe it’s a violation (of the Gann Limit), we would commence litigation,” he said.