Panel Says State Tops Gann Limit : $958-Million Revenue Surplus Finance Unit

In a surprising development, the Commission on State Finance said Wednesday that state government will collect $958 million more in taxes in the budget year ending June 30 than it can legally spend.

The disclosure came in a report accepted unanimously by the blue-ribbon commission composed of seven state political leaders led by Treasurer Jesse M. Unruh.

Linda Proaps, commission executive secretary, said the situation presents state leaders with “a serious problem” because they will either have to find a way to legally spend the money or return the tax revenues to taxpayers.

The situation comes about because of the spending limit approved overwhelmingly by voters in 1979 as Proposition 4. Under the law, an annual limit is placed on the amount of tax dollars that can be spent by state government. The limit, which has never been reached, is adjusted each year to reflect the rate of inflation and population growth.

Next year’s proposed $39.3-billion budget presented by Gov. George Deukmejian in January, together with subsequent funding updates by the Department of Finance, had indicated that during the current fiscal year, the state would not get close to the spending lid--called the Gann Limit after its author, anti-tax crusader Paul Gann. The fiscal year ends June 30.

However, the commission staff said an unexpected surge in tax revenues has brought the state not only up to the spending limit but pushed it well beyond.

Proaps estimated that tax revenues this year, fueled in large part by changes in federal tax law, will be $1.5 billion higher than revenue projections in the state budget.

“The revenue situation has changed dramatically. We have had very substantial income tax payments in April,” she said.

Unruh Not at Meeting

Unruh, who has been ailing, did not attend the meeting. But his office issued a statement quoting him as saying: “We are awash in money. . . . We’ve known that the (spending) limit would catch up to us for some time now, but thought we had at least another year. We don’t--we have just two months.”

The commission’s revenue estimates are unofficial. But commission forecasters have a substantial amount of credibility, and their reports often are bellwethers signaling important trends in state finance. Within two weeks, the Department of Finance will issue the official revenue and expenditure estimates, which will be used to determine what the actual spending limit is.

The commission was created in 1980 to serve as an independent economic forecasting unit for state government because of widespread dissatisfaction in the Legislature over Finance Department forecasts that failed to anticipate multibillion-dollar treasury surpluses in the late 1970s.

State Finance Director Jesse R. Huff, who directs the Department of Finance under Deukmejian, is a member of the commission.

Huff accepted the commission’s revenue estimates, saying they are more or less in line with what his department is discovering.

“There is an awful lot of cash in the bank that we did not expect,” the governor’s chief fiscal adviser said.

Too Early to Tell

But Huff said it is too early to tell whether the state is over the spending limit and, if so, by how much.

He said the state is still in the process of sending out income tax refunds and it is not known whether they are running above or below budget estimates. He also noted that a final accounting had not been done on expenditures.

Commission officials attributed the upsurge in revenues, as did Huff, to changes in federal tax law enacted in 1986 and put into effect this year.

The change mentioned most often is the treatment of capital gains--profits from real estate, stock market and other profitable transactions. Under the old tax law, capital gains were taxed at a lower rate than they are now, creating an incentive for high-income taxpayers to take profits and declare more income during the 1986 tax year. Officials note that the biggest revenue gains are coming from personal income taxes. Sales and business taxes are relatively stable.

The embarrassment of riches, if it holds up, could create political problems for state leaders.

Return the Money

Pressure could develop to return the money to taxpayers, but so far, state leaders appear to be resisting that possibility.

Legislation still could be passed that would allow the money to be spent legally. Under the law, however, the Legislature and governor would be restricted to spending the money to retire bond debt, distributing it to local governments or paying off public pension liabilities.

Getting a jump on the political debate that is sure to develop, Deukmejian Saturday proposed selling $2.3-billion worth of bonds to finance state transportation projects. Paying for the highway construction with bonds is a way of financing a project without exceeding the state spending limit.

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly Ways and Means Committee and a member of the commission, said he is developing “a series of options” on how to spend the money that he will present to other Democratic leaders.