LAO Report Says State Spending Limit Will Be an Issue in Budget Talks

The Proposition 4 spending limit, known as the Gann limit, will be an important issue for the state budget this year and in future years given the state’s strong revenue collections, according to a report from the Legislative Analyst’s Office (LAO).

Proposition 4, which established an appropriations limit in Article XIIIB of the state constitution, requires that if the state has revenues above the limit over two consecutive years it must divide the excess between taxpayer rebates and additional spending on schools. The state has estimated excess revenues of about $100 million between 2018‑19 and 2019‑20 and about $500 million between 2019‑20 and 2020‑21.

The LAO anticipates that the state will either need to reduce taxes or issue refunds to taxpayers and make additional payments to schools in these amounts. The report also notes that without significant budget changes, the state likely does not have the capacity for new services or program expansions.

The report cited two primary reasons that room under the limit has diminished: the growth in personal income tax revenue and constitutionally required spending. The LAO reports that the growth in personal income tax revenue has exceeded the growth rate of the state appropriations limit because the personal income tax is the state’s largest revenue source and there has been faster income growth among high‑income earners. The LAO also reports that constitutionally required school spending has been driven by faster state revenue growth and has increased faster than school limits. “Because the state absorbs appropriations above school limits, this trend has resulted in diminished room for the state,” the report notes.

The LAO outlined five options for the legislature to consider in response: (1) issue tax refunds and allocate excess revenues to schools, (2) increase spending on excluded purposes, (3) reduce proceeds of taxes and spending, (4) make statutory changes to the state appropriations limit, and (5) go to the voters.