Nothing shouts “cost of living” quite as loudly as gasoline prices in Los Angeles averaging $6.01 a gallon. Inflation has reached a 40-year high nationally, and unsurprisingly has climbed to the top of voter concerns.
At the same time, an embarrassment of riches has flooded California’s state treasury. Governor Gavin Newsom and the Legislature struggled to spend and save a $75 billion surplus in the 2021–22 budget (including federal COVID relief funds), only to face a projected (and growing) $46 billion surplus for the 2022–23 budget.
The fiscal fortunes are a direct result of strong economic performance by key California economic sectors, even in the midst of a devastating pandemic and the associated shut-downs.
As these surpluses mount, elected leaders are considering doing something that is not only politically smart, but required: returning some of the tax bounty to taxpayers.
Early in the year, Republicans in the state Legislature proposed a “gas tax holiday,” which would have suspended the 51 cents-per-gallon levy for six months, using about $4.4 billion of general funds to hold transportation programs harmless. Democrats in the Legislature defeated this proposal in early March.
Governor Newsom proposed a temporary suspension of the inflation adjustment for fuel taxes in his budget proposal, and recently upped that ante by surfacing a $400 per vehicle tax rebate, without regard to the incomes of the vehicle owners. This $11 billion tax benefit would also include savings for those who depend on public transportation.
Two more proposals surfaced over the past week from the Legislature. Several Assembly Democrats and one independent Member proposed a $400 per taxpayer rebate which would return about $9 billion to taxpayers. Additionally, Speaker Rendon and Senate Pro Tem Atkins have proposed a $200 per resident tax rebate, including dependents (with incomes up to $250,000).
The general rebates, based on income or vehicle ownership are much more likely to resemble whatever final agreement is reached, in part because they recognize costs are going up for many of the items purchased by Californians—not just gasoline. But these proposals also recognize the looming constitutional mandate that in any event would require the Legislature to approve a taxpayer rebate.
In 1979 during the wake of the Tax Revolt, California voters approved the “Gann Limit,” a ballot proposition capping annual state spending and requiring taxpayer rebates if spending exceeded the cap. Later amendments to the Gann Limit split the excess revenues between taxpayers and schools. The spending lid has been pierced only once since it was adopted, in 1986, but the post-pandemic revenue surges will ensure some amount of taxpayer rebate.
In January, the Governor estimated that spending over the cap will total about $2.6 billion over two fiscal years. However, revenues continue to flow into state coffers faster than originally estimated. The nonpartisan Legislative Analyst in February projected revenues in the 2021-22 budget will increase by $5 billion to $20 billion over the Governor’s estimates.
The only practical options for the Legislature to reduce these surpluses are to earmark money for targeted or general tax cuts or credit, or to spend surpluses on exempt categories of spending, such as infrastructure investments or to address statewide declared emergencies. The emergency spending must be approved by a two-thirds vote of the Legislature.
For the second year running, the Legislature and Governor must allocate record budget surpluses. The Gann Limit is a tool that will help enforce fiscal discipline and ensure taxpayers have a voice.
Loren Kaye is president of the California Foundation for Commerce and Education, a think tank affiliated with the California Chamber of Commerce.