California’s tax revenue is surging. Will Gov. Newsom send some back to taxpayers?

California taxpayers could be due for their first state budget refunds in decades thanks to a disco-era spending cap that on only one previous occasion resulted in households getting checks from Sacramento.

It probably won’t be the last time, either, according to a new report from state budget experts at the Legislative Analyst’s Office.

Some are cheering the news that millions of households could be getting money back from Sacramento, making good on the promise of the the 1979 ballot initiative that created the spending cap.

But other policy advocates are urging legislators to change or get rid of the cap, saying it could prevent legislators from pursuing ambitious proposals, such as single-payer health care.

“Should the needs and priorities of millions of Californians right now take a back seat to the 2.6 million Californians in the disco era” who voted for the spending cap in 1979, asked Scott Graves, research director at the California Budget & Policy Center. “We created a crazy situation,” he said.

The disagreement hinges on the so-called Gann limit, named after the late taxpayer advocate Paul Gann. It caps California’s spending at the 1978-79 level, adjusted for population growth and growth in personal income.

California taxpayers received $1.1 billion in refunds because of the cap in 1986, a milestone that hasn’t been repeated.

Gov. Gavin Newsom in January telegraphed the likelihood that Californians could get a little money back from Sacramento this year because of the Gann Limit when he presented a $227 billion budget proposal showing state spending exceeding the spending cap by about $100 million.

By state law, half of that money would go to schools and half would go back to residents. Most households would get a few dollars in the mail under the projections Newsom disclosed.

Since then, the state’s budget outlook grew even rosier, with tax collections coming in $16.7 billion above what Newsom projected, meaning even more money could be doled out directly to taxpayers.

“As revenues have continued to surge this spring, it could trigger the ‘Gann Limit’ – which would be only the second time it’s happened in more than 40 years,” Finance Department spokesman H.D. Palmer said in a statement. “We’ll know by next week whether we’ve reached this point. If so, it will be reflected in the Governor’s revised budget.”

Wealthy Californians paying more tax

According to the new report by the legislative analyst’s office, changes in how the state’s wealthiest residents earn income could set the stage for more taxpayer refunds through 2024-25 running into the billions of dollars.

The Gann limit formula does not account for investment income from capital gains, which have been propelling California tax collections from wealthy households for several years under the state’s progressive tax structure.

Personal income grew by about 50% between 2010 and 2018, but the tax revenue from those making over $200,000 grew by nearly 150% in the same period, according to the report. The trend is expected to continue.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, said lawmakers can use this as an opportunity for a broad tax cut that would put the state under the cap.

“We’ve watched the extraordinary growth in revenue and spending in California, which we think is not a healthy trend that’s going to be sustainable over the long term,” Coupal said. “Taxpayers have... provided way more than sufficient revenue needed for the function of the state government.”

Legislators have some flexibility to move money around to avoid hitting the cap.

“But at some point, they’ll run out of options,” Coupal said.

Could the money go to health care?

Some policy advocates, however, are pushing legislators in the other direction.

Anthony Wright, executive director of Health Access California, called the cap archaic. The cap could limit California from expanding Medi-Cal to cover undocumented Californians to providing more subsidies for residents to get health insurance through Covered California, he said.

And Graves of the California Budget & Policy Center said keeping the spending cap at the 1978-79 level is not sustainable, given the costs of health care are well outpacing the rate of inflation.

“The cost of providing a basic level of programs and services Californians want will continue to rise,” he said. “If we don’t allow the revenue to rise with them, we are going to find ourselves in a vise grip where we can’t meet our basic needs as Californians.”