This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
Cal-Tax Home Page | About Cal-Tax | Subscribe

That's more than double the size of any previous budget surplus. A 21 percent increase in general fund revenue - mainly income and sales taxes - is among the highest in modern California history, according to the nonpartisan Legislative Analyst's Office (LAO) in Sacramento. General fund spending, in the May 15 budget update, would grow 16 percent to $78.2 billion, including nearly $7 billion in one-time appropriations. The increase is 10 percent when counting ongoing spending commitments.

General fund spending was about $40 billion less than a decade ago.

Superlatives aside, having too many tax dollars is a source of strife for the state's policymakers - Governor Gray Davis' administration and members of the state Legislature. However, voters passed a statewide initiative 21 years ago that diminishes the scope of the too-many-tax-dollars "problem." Plain and simple, the answer is to limit spending.

Coming into play this year is the constitutional limit on state and local government spending approved by voters in 1979. Spending limits are controlled by growth in population and personal income. Until now, the Gann limit (named for Paul Gann, who sponsored the ballot initiative) has been exceeded only once, resulting in $1.1 billion in 1987 tax rebates. That also was the last time total state revenues grew by about 20 percent.

To be sure, Californians have been overtaxed. And, politics being politics, Californians will get some form of deserved relief. The governor's $1.76 billion rebate proposal (up to $150 for some 12 million people who paid state income taxes for 1999) is an effective first step, as it keeps that much out of the state's spending base.

Tax relief is great, particularly when it involves reforms that make California's tax structure more competitive with other states and contributes to economic growth. Yet, in the final analysis, the spending limit is about spending. Policymakers who do not realize this are missing what voters intended in at least two statewide elections.

For taxpayers, the overriding benefit of the Gann limit is that it limits government spending. California voters affirmed in 1979 (Proposition 4, the Gann limit) and again in 1990 (Proposition 111) that a spending limit policy is necessary for state and local government in California. With these two propositions, voters have provided policymakers guidance for dealing with significant spikes in revenue.

While federal economic data was still pending at this writing to enable the Department of Finance to figure with real precision what the state's appropriations limit will be, Finance Director Tim Gage said he expects the limit is being exceeded by about $1 billion in the current year ending June 30. However, to force tax rebates, the limit must be exceeded over two years, and Mr. Gage sees spending falling $3 billion to $4 billion below the limit in 2000-01. That is due in part to proposals to spend much of the surplus for $150 tax rebates and other items that the administration says are exempt from the appropriations limit, such as more money for highway construction.

Stephen Kroes

Voters understand that if the California Legislature over-commits taxpayers by plowing surges of revenue into new or existing government spending programs, tax increases will be necessary later to sustain these programs over the long term.

Unfortunately, California has a track record of mishandling surplus revenue. Too often, when revenues grow quickly, the budget is put at risk by too much ongoing spending. California's finances have been subject to a boom-bust cycle for many years. When the economy is strong, revenues grow quickly. During the boom years, policymakers typically commit all of the revenue to spending programs. Then, when the next recession comes (and it always comes), revenues slow dramatically, but spending obligations have been ratcheted up to an unsustainable level. Large deficits result when revenues are unable to keep pace with inflated spending demands.

This boom-bust cycle is largely caused by the state's aggressive revenue system, especially the personal income tax. When the economy grows, California's income tax revenues grow even faster than the overall rate of economic growth.

In fact, if policymakers had merely held spending growth from 1985 through 1990 to the average rate of revenue growth during that period, the state would have enjoyed a multi-billion-dollar surplus in 1991 instead of a $14 billion deficit.

The 1991 budget, with its huge deficit and resulting tax increases, showed the destructive impact of having committed too much of the 1980s revenue surge to ongoing spending programs. We should not repeat the mistake.

For the sake of taxpayers and sound budgeting principles that will reduce the pressure for higher taxes in future years, the letter as well as the spirit of the spending limit law should be respected in this current cycle of excess revenue.

- Stephen Kroes is vice president and director of research of the California Taxpayers' Association.