Legislators Study Projects in Bid to Avoid Tax Rebate

With a surplus of as much as $13 billion, California legislators are facing the prospect of being forced to give rebates to taxpayers totaling $1 billion or more. Instead, they are scrambling to find ways to spend the bounty.

The state is required by a 1979 initiative to return money to taxpayers when tax revenue exceeds even the most optimistic forecasts. A 1979 voter-approved initiative created this “Gann limit,” named after its author, the late anti-tax crusader Paul Gann.

The limit was triggered only once, in 1987, when taxpayers received checks averaging $93 in a $1.1-billion statewide rebate. More than a decade later, the state could be up for a repeat performance. With unemployment at 20-year lows, the state is collecting record taxes on sales and income taxes on wage increases and capital gains from stock market profits.

The soonest checks could go out would be the fall of 2001--although it’s too early to count on a windfall.

“I don’t think it will come out that way,” Assembly Budget Chairwoman Denise Ducheny (D-San Diego) said of the prospect of rebates. “There’s a whole menu on the table. We haven’t kept up with the growth in California. We really starved a whole bunch of needs--parks, schools, roads.”

While Gov. Gray Davis prepares to unveil his revised spending plan for the 2000-01 fiscal year later this month, the Democratic-controlled Legislature is finishing work on its budget proposals. Davis initially said the budget would be $88 billion, but the final product is expected to exceed $90 billion.

Senate and Assembly budget committee members are urging that the surplus be spent on public works projects, an aid package for local government and a plan to pay off debt.

And “obviously, we’re going to be looking at tax cuts,” Ducheny said.

Legislative Analyst Elizabeth Hill is projecting that the state’s tax revenues will exceed Davis’ budget forecasts by as much as $6 billion in the current year, and up to $7 billion in the 2000-01 fiscal year--for a combined surplus that could reach $13 billion.

The projected surplus could push the state over the Gann limit, which is based on a formula that calculates tax revenues, population growth and the cost of living. According to Hill’s analysis, the budget surplus could exceed the limit by as much as $5.2 billion. The law calls for tax revenues that pass the limit over a two-year period to be divided equally between taxpayer rebates and public education.

“The state has seen a tremendous increase in personal income taxes,” said Brad Williams, a senior economist with the legislative analyst’s office. “For the public, it either means lower taxes, more spending on things like freeways and school facilities or more money for local governments.”

Among the likely tax cuts would be a further reduction in the annual fees motorists pay to register their cars and trucks. The car tax has been cut twice in the last two years.

Ducheny suggested other reductions: breaks for specific industries such as entertainment, a sales tax cut on textbooks, an earned income tax credit to aid low-income Californians, or an adjustment to the state income tax formula to help people with moderate income.

Republicans are expected to push for broader cuts, with proposals ranging from a break for renters to an expansion of income tax benefits for homeowners.

“We need to strengthen education, rebuild our highways and give a significant tax cut,” said Assemblyman Scott Baugh (R-Huntington Beach), leader of the Assembly’s minority Republicans. “I really think a $3-billion tax cut would be reasonable.”

Assemblyman Tom McClintock (R-Northridge) said he will push for rebate checks to taxpayers.

The Gann limit, formally known as Proposition 4, was retooled in 1990 when voters approved Proposition 111. The 1990 measure raised the limit, and allowed the state to exempt some money raised by gasoline taxes.

“After Proposition 111 was pushed through, nobody thought to expect to hear from [the Gann limit] again,” McClintock said. “Yet massive spending increases have pushed us up and over it again.”

In addition to a variety of tax cut plans, legislators and Davis could shift more money to areas exempt from the limit. They could give money to local government, pay off debt on existing bonds or spend money to build new capital projects. Davis is scheduled to release his revised budget proposal on May 15.

“We know the limit is out there and we’re looking at it,” finance department spokesman Sandy Harrison said.

Lawmakers will clearly take advantage of the Gann limit’s exception for building projects. Assembly Speaker Bob Hertzberg acknowledged Thursday in a news conference unveiling a $1-billion spending plan for housing programs that some of the money will be considered for capital outlay expenses.

Local government officials also hope for a major boost. The 1979 Gann initiative allows the state to avoid rebates by giving money to local government, as long as the state does not dictate how the money must be spent.

Local officials have complained about budget troubles since 1993 when then Gov. Pete Wilson and the Legislature took much of their property tax revenue and gave it to schools. Since then, the property tax shift has cost local government more than $20 billion, including $4 billion from Los Angeles County.

“The surplus creates an opportunity for the state to deal with its potential limit problem by transferring money to counties,” Daniel Wall, lobbyist for Los Angeles County. “We’d dearly like to get some of that property tax back.”

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Times staff writer Miguel Bustillo contributed to this story.