Page 83 - Yucaipa Valley Water District

Workshop Memorandum No. 17-075 Page 4 of 18

Overview of Appropriation Limit

Introduction

In the 1970s soaring property values in California led to dramatic increases in property taxes,
prompting a tax revolt that resulted in the passage of Proposition 13 in the June 1978 California
primary. Proposition 13 reduced local property taxes by 57% and thereby slashed the revenue
base for local governments and schools. Over the years the revenue loss has been made up by
a varying mix of state funds and new revenue from specialized local fees and taxes, as well as
by outright local budget cuts.

The California tax revolt did not end with Proposition 13. Seventeen months later, in November
1979, voters passed the Proposition 4, known as the Gann Amendment. Proposition 4 imposed
a limit on most state and local government expenditures from tax sources. The limit is calculated
annually according to a formula based on population and the cost of living. Under Proposition 4,
excess revenues must be returned to the taxpayers.

Both Propositions 13 and 4 have been modified in the years since their passage. While weakened
by the changes, Propositions 13 and 4 remain constraints on California state and local budgeting,
and continue to be focal points in the public policy debate about California taxing and spending.

Summary of Proposition 4 and Related Voter Initiatives

Modern spending limits in California began in 1979 with the passage of Proposition 4 (Article XIII
B of the California Constitution). Also called the Gann Initiative after its chief sponsor, Paul Gann,
Proposition 4 places an appropriations limit on most spending from tax proceeds. The limit for
each year is equal to the prior year's spending with upward adjustments allowed for changes in
population and the cost of living. Most state and local government appropriations are subject to
the limit. However, the law exempts certain appropriations from the limit including capital outlay,
debt service and local government subventions. When the limit is exceeded, Proposition 4
requires the surplus to be returned to the taxpayers within two years. Appropriations in the two
year period can be averaged before becoming subject to the excess revenue provisions of the
Gann limit.

Voters approved the Gann limit in a November 1979 special election by a 74% margin. The late
1970s were a time of surplus state revenues in California, and voter exasperation at the inability
of the legislature and the governor to agree on a plan to return the surplus to the taxpayers in the
form of refunds or property tax relief helped fuel the tax revolt that led first to Proposition 13 and
then to Proposition 4. With the Gann limit, voters took the matter of spending limits into their own
hands, and ignored objections that spending limit formulas are an artificial constraint on policy
making and hamper the government's ability to address citizen needs.

During the early 1980s, increases in population and the consumer price index outpaced the
growth in state revenue, and the Gann limit was not reached. However, a surge in state revenues
in 1987 caused the limit to be breached, and led to the first refund to taxpayers.

Voters have modified the Gann limit in a series of initiative measures. Proposition 99 (1988) and
Proposition 10 (1998) exempted new tobacco taxes from the Gann limit. Proposition 98 (1988)

Yucaipa Valley Water District - May 30, 2017 - Page 83 of 138