Jon Coupal: The Gann Limit is back in the news

On the first day of the new legislative session, Assemblymember Avelino Valencia, D-Anaheim, introduced Assembly Constitutional Amendment 1 (ACA 1). The proposal would double the amount of state funds that could be placed in the Budget Stabilization Account (BSA) from 10% to 20% of the annual budget. The ostensible reason for the increase is to address the very real problem of revenue volatility. Because California is overly reliant on high income earners who generate massive amounts of capital gains and stock option funds in boom years, it is vulnerable to big drop-offs in revenue during the bust years.

Indeed, revenue volatility has been such a large problem that Gov. Arnold Schwarzenegger created the California Commission for the 21st Century Economy to come up with solutions. Regrettably, while there was a broad consensus that something should be done about the boom and bust cycle, the commissioners could not agree on what to do about it.

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The goal of placing more funds in reserve because of volatility makes sense, if it can be accomplished without violating the letter and the spirit of Gann spending limit. Unfortunately, ACA 1, in its current form does just that. Here’s how.

Just a year after Proposition 13’s passage in 1978, California voters approved the Gann spending limit which, like Prop. 13, sought to restrain the size and growth of government. But unlike Proposition 13, which was a direct limit on taxation, Gann attempted to limit government spending. It limited the growth of state and local government expenditures to a base-year level adjusted annually to reflect increases in population and inflation.

Initially, the Gann limit performed as designed and resulted in a modest rebate to taxpayers in 1987. But subsequent measures backed by special interests weakened the Gann limit by creating exceptions for education and transportation spending as well as substituting a far more generous inflation factor.

Ironically, after these changes, most public finance observers – including yours truly – wrongfully assumed that California would never again bump up against the limit. But a big surplus in fiscal year 2022-23 put the state on the brink of reaching that limit. While that collision was briefly avoided due to COVID-19, California once again is confronted with a Gann issue that can no longer be ignored.

For taxpayers, the best outcome would be to let the Gann limit run its course and return money to taxpayers “by a revision of tax rates or fee schedules within the next two subsequent fiscal years.” Cal.Const., Art. XIIIB, Section 2(a)(2). This is consistent with the plain language of Gann and is more than warranted given California’s heavy tax burden.

Click here to read the full article in the OC Register

Single-Payer Health Care Might Violate Key Taxpayer Protection

Healthcare costsThe California Senate voted late on June 1 to create a single-payer health-care system that will cover every resident in the state with no money out of their pockets. But this “free” health care would be anything but. Its costs are going to be steep, painful, probably deadly – and might violate a key taxpayer protection in the State Constitution known as the Gann Limit.

Under the Healthy California Act (Senate Bill 562), the state would cover all medical expenses, even those incurred by illegal immigrants. There would be no premiums to keep current, no deductibles to meet before coverage starts, nor copays to contribute. All must participate, even those happy with their employer-provided health insurance or their private individual plans.

The cost? A mere $400 billion a year, according to a Senate Appropriations Committee estimate. For those who worry about such details – which apparently excludes the 23 Democrats who voted for the bill – that’s more than three times the state’s proposed 2017-2018 $124 billion General Fund budget.

But maybe there’s nothing to worry about. A report funded by the California Nurses Association said single-payer will cost a mere $331 billion a year – only about 2.67 times the proposed state General Fund budget.

So what would we get for either $400 billion or $331 billion? Top-flight medical care that’s always available? Hardly. With more 40 million across the state – including an estimated 2.35 million illegal immigrants – placing demands on the system for “free” services, care will be rationed, wait times unbearable, and treatment and medical outcomes will suffer. Californians may have the privilege of paying a new 15 percent payroll tax to fund half the cost, if the Senate Appropriations Committee’s recommendations are adopted, with the rest coming from existing federal, state and local funds that would be redirected into the system.

Or maybe we’ll instead be mugged by a 2.3 percentage point increase in the state sales tax, along with a 2.3 percent gross receipts tax for businesses. This is how the California Nurses Association study plans to raise about $106 billion, with the remainder taken from federal and state sources.

It is the massive proposed state spending increases where the single payer proposal runs into trouble, even if it passes the Assembly and is signed by Governor Brown – both unlikely propositions.

The Gann Limit is the 1979 proposition approved by voters that imposes state and local government spending limits. The Senate Appropriations Committee says that “to successfully implement the bill” and fund it with the 15 percent payroll tax, “the voters would need to amend the State Constitution to either repeal the Gann Limit or exempt the taxes to fund the Program from the Gann Limit.”

Since support for the single-payer system drops from 65 percent to 42 percent if it requires a tax hike, according to the Public Policy Institute of California’s poll, it likely would be rejected at the ballot box.

Californians may also be asked to suspend Proposition 98, which dedicates a portion of state tax revenue to fund education, to implement single-payer. Absent a voter-approved suspension, the Senate Appropriations Committee notes that half of the proposed new taxes for single-payer would go to education. Prop. 98 has become a sacred cow of state politics, and its suspension will be no easy task.

Californians are already overtaxed. Yet lawmakers are thinking about adding to the load just months after they passed a $52 billion tax hike for transportation. California has the highest marginal state income tax rate in the country at 13.3 percent and the highest state sales tax. For the fifth consecutive year, the Small Business and Entrepreneurship Council’s Small Business Tax Index ranked California dead last.

The collective crush of these tax burdens are factors in the exodus of those leaving California for better economic opportunities elsewhere. Creating an enormously expensive single-payer system will only produce more economic refugees, including the former employees of health care giant Kaiser Permanente, which has said that a single-payer system will put it out of business in California.

While the financial costs would be extreme, the human costs are likely to be worse. Pacific Research Institute President Sally Pipes recently noted that single-payer systems have allowed hundreds of veterans awaiting care in the US VA hospital system to die; caused a “humanitarian crisis” in Britain; and triggered a stream of Canadians leaving behind their “free” care to seek treatment in America.

During the national health care debate in the 1990s, P.J. O’Rourke somewhat famously said that “if you think health care is expensive now, wait until you see what it costs when it’s free.” It’s an insightful observation anyone can understand. Yet its simple logic is lost on the political majority in Sacramento that seems to determined to drive California into Blue State ruin.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

This piece was originally published by Fox and Hounds Daily