California needs a fiscal rules revival

On Tuesday, California voters decide the fate of Proposition 30. If approved, the state’s top personal income tax rate would exceed 15%, higher than any state in the union. For years now, the Golden State has leaned into higher tax and spend policies, which has sent businesses and individuals packing. But it wasn’t always this way.

More than four decades ago, on Election Day 1978, California voters approved Prop. 13 to roll back property taxes, cap property tax rates, and impose a two-thirds supermajority vote requirement in both houses of the legislature to raise taxes.

The following year, nearly 75% of voters wisely approved Proposition 4, also known as the Gann Limit. This amendment limited the growth of appropriations to population growth and the lesser of the Consumer Price Index or California personal income growth. Revenues that exceeded the limit had to be refunded to taxpayers within two years. Gann also applied to local governments.

This type of amendment is known as a state fiscal rule, which is a formal restraint on spending levels or growth. Fiscal rules must be designed to be effective, sustainable, and not undermine appropriate responses to genuine fiscal emergencies.

The Gann Limit, however, exempted debt service, retirement costs, and unemployment insurance compensation. Unfortunately, voters approved numerous amendments throughout the 1980’s that weakened California fiscal rules. These amendments required mandatory refunds be spent directly on education, raised the Gann Limit to a weighted average of population growth and per capita personal income growth, and expanded the list of exemptions. Now these amendments are not worth the paper they’re printed on.

California should look to states like Colorado, where the Taxpayer’s Bill of Rights (TABOR) turned 30 years old this week and is considered the gold standard for state fiscal rules.

TABOR limits the amount of revenue Colorado lawmakers can retain and spend to a reasonable formula of population plus inflation growth. If the state government collects more tax revenue than TABOR allows, the money is returned to taxpayers as a refund. Since 1992, taxpayers have been refunded $8.2 billion.

TABOR has survived voter approved changes, numerous lawsuits, and countless attacks from critics who claim it will cause the state economy to crumble. Despite these challenges, TABOR has kept government accountable to Coloradans, and the state economy has remained robust, attracting many new businesses – including from California – rather than force companies to search for a friendlier tax climate. Without TABOR, the Colorado economy would be in a much different place.

Economist Barry Poulson, who served on the Colorado Tax Commission, witnessed this firsthand. In his new American Legislative Exchange Council (ALEC) report, TABOR Turns 30, Dr. Poulson recalls how citizens in Limon, Colorado rejected a ballot measure calling for a large sales tax increase because they understood that the sales tax increase would drive business out of Limon and across the border to Kansas.

California has lost 1.1 million people since 2011, and Colorado is steadily gaining residents and businesses from California. Governor Newsom’s latest gimmick is to offer rebate checks from the budget surplus caused by billions of dollars in federal aid. These one-time checks won’t make California a more affordable place to live and, if the program continues, will allow the cost of living to continue to skyrocket.

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Instead, California should revive its fiscal rules and make them as strong as possible. Analysis from ALEC’s Fiscal Rules project shows that if California had enacted its own TABOR the same year as Colorado, taxpayers would have saved over $100,000, an average of just under $3,500 per household per year, compared to the status quo.

With its own Taxpayer’s Bill of Rights, Californians would be empowered to hold government accountable and keep more of their hard-earned money, while making the state a more affordable place to live. Sacramento should put aside the gimmicks and revive strong fiscal rules.

Lee Schalk is the Vice President of Policy at the American Legislative Exchange Council and Thomas Savidge is the Research Director of the Center for State Fiscal Reform at the American Legislative Exchange Council.

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