Warnings From Sacramento

Legislative Analyst Elizabeth Hill, the newest of Sacramento’s independent experts on state finances, has declared that the Gann spending limit is a fiscal straitjacket for California state government.

She also proposed Wednesday that the Legislature initiate a ballot proposition to repeal the 1979 voter initiative, Proposition 4, that set specific limits on how much state and local governments could spend with a provision that surpluses be returned to the taxpayers.

Hill told legislators that, primarily because of the Gann limit, there is a $1.6-billion gap between available tax revenues and program costs for the budget now under consideration by the Legislature for the next fiscal year. She said the limit prevents enough growth in state spending just to maintain the current level of services in state government or to keep pace with the state’s economy. The limit tends to distort government decision-making, she added.

Several good examples of such distortion are in Gov. George Deukmejian’s proposed budget. In one, he proposed that $331 million of new tobacco-tax money approved by voters in passing Proposition 99 last fall be used to replace other state money that pays for health care for the poor. Proposition 99 specified that tobacco-tax income go for new or supplemental programs, not to supplant current spending. Hill joined those protesting the action and demanding that the governor restore the money for the poor.

Earlier this month, Gail Greer Lyle, executive secretary of the Commission on State Finance, told a legislative committee that revenues will fall $1.4 billion short of needs for the new budget year. A shortfall of roughly $1 billion will occur in each year through 1994-95, the commission report said. After that, the commission believed that the revenue base would be sufficient to meet ongoing spending levels. That, of course, would not accommodate any new programs, such as additional gasoline taxes that desperately are needed to develop the state’s transportation system. In the meantime, the state continues to resort to bond issues for many new programs in part because the bond money is exempt from the Gann limit. While no experts believe that the increase in debt financing has reached a danger point, Hill noted that it needs to be watched carefully.

Gann itself is distorted by last November’s Proposition 98, an initiative measure that guarantees roughly 40% of state revenues for public education. Proposition 98 also provides that when state revenues exceed the Gann limit, a portion of the surplus money go directly into school finance and not into rebates for taxpayers. Thus, much of the initial impetus for Gann--the return of so-called excess revenues to the people--has been eliminated.

The limit has been exceeded once, in 1986-87, when about $1 billion was rebated. That turned out to be a major mistake. Revenues soared over the limit in part because of an unexpected windfall in capital-gains taxes paid by people who rushed to sell stocks before the new federal tax reform law went into effect with its increase in the federal tax on capital gains. In the following year, there was a tremendous drop-off in capital-gains taxes paid and the state ran $1 billion in the red because of the unexpected decline in revenues.

Repealing the Gann limit will not be easy, but having the support of independent experts like Hill helps. The legislative leadership, the governor and the California business community must work together to develop a reform measure that all can support--the sort of unified support that will be needed to persuade the voters that retaining the Gann limit is pure folly.