What Is the Gann Limit? California’s Spending Cap Explained

The Gann Limit is a provision in the California Constitution that caps how much state and local governments can spend from tax revenue each fiscal year. The cap is recalculated annually based on changes in per capita personal income and population, and when tax collections exceed it over a two-year window, the surplus must be returned to taxpayers — with half of any state surplus going to K–14 schools.

The limit lives in Article XIII B of the state constitution, added by voters through Proposition 4 in 1979 and significantly reworked by Proposition 111 in 1990.¹

How the Spending Ceiling Is Calculated Each Year

Article XIII B, Section 1 sets the basic rule: no government entity’s total appropriations from tax proceeds can exceed the prior year’s limit, adjusted for changes in the cost of living and in population.² The specific adjustment factors differ depending on the type of government.

For the state, the cost-of-living factor is the change in California per capita personal income. The population factor blends statewide population growth with the change in average daily attendance for K–14 schools, weighted by the share of the budget each category represents. For local agencies other than schools, the governing body can choose between per capita personal income or the percentage change in the local assessment roll from new nonresidential construction.³ School districts use the change in average daily attendance as their population measure.

The result is a mathematical ceiling that moves with economic conditions. Strong income growth gives governments more room; lean years tighten the cap. That linkage is the core design: public spending is tied to the private economy’s capacity to support it.

What Counts as Proceeds of Taxes

The cap only touches money classified as “proceeds of taxes” under Article XIII B, Section 8. That category covers tax revenue flowing into the General Fund and special funds, interest earned on those invested tax revenues, and the portion of any regulatory fee or user charge that exceeds the reasonable cost of providing the service — on the theory that the excess functions as a disguised tax.⁴

Several large revenue streams fall outside the definition and therefore do not count against the limit:

Federal grants and reimbursements.
User fees and regulatory charges that do not exceed the reasonable cost of the service or regulation.
Lottery proceeds and tidelands oil revenue.
Gifts, borrowed funds, and proceeds from selling government property.
Gas and diesel taxes above nine cents per gallon, sales taxes collected on that increment, and truck weight fees exceeding the levels in effect on January 1, 1990.⁵

The fee-versus-tax line matters a great deal for local governments. Under Proposition 26, passed in 2010, any government-imposed charge is presumed to be a tax unless the government can show it fits a specific exception, such as covering the reasonable cost of a service or regulatory activity. When a fee crosses that line, the excess counts toward the Gann Limit, and that classification is where most of the legal fighting happens.

Spending That Is Exempt from the Limit

Even revenue that qualifies as proceeds of taxes can be spent outside the cap if it falls into an exempt category listed in Article XIII B, Section 9.⁵

Debt service on voter-approved bonds, so long-term obligations don’t consume the flexible portion of the cap.⁶
Spending required by court orders or federal mandates, where the government has no discretion.
Qualified capital outlay: fixed assets, including land and construction, with a useful life of at least ten years and a value of at least $100,000 per project. Roads, bridges, and buildings are typical examples.⁷
Local subventions. Money the state transfers to local governments is excluded from the state’s own limit and counts instead against the receiving agency’s limit, so the same dollar isn’t counted twice.
Certain special districts, including those that existed before January 1, 1978, and levied very low property tax rates, or districts created by popular vote and funded entirely by non-tax revenue.

The qualified capital outlay exemption is one of the Legislature’s most important release valves. By directing revenue into infrastructure projects that meet the ten-year, $100,000 threshold, lawmakers can keep spending under the cap without returning money or cutting services. That approach got heavy use during the early 2020s when surging revenues pushed the state close to the limit.

What Happens When Revenue Exceeds the Limit

The surplus rules in Article XIII B, Section 2 operate differently for the state than for local governments.⁸

State Surplus

The state measures revenue across a fiscal year and the immediately following fiscal year. If the two-year total exceeds what the state is permitted to appropriate under the limit for that same period, the excess is split evenly:

Half goes to K–14 education, transferred to a fund established under Article XVI, Section 8.5, a provision added by Proposition 98, which supports public schools and community colleges.
Half is returned to taxpayers through tax rate reductions, fee schedule adjustments, or direct rebates, and must be delivered within the following two fiscal years.⁸

Local Surplus

Local governments do not get the 50/50 split. When a city, county, or other local entity collects more in proceeds of taxes than its limit allows over the same two-year window, 100 percent of the excess must be returned to taxpayers through revised tax rates or fee schedules within the next two fiscal years.⁹

When the State Has Actually Hit the Cap

California has triggered the surplus-return mechanism three times. In fiscal year 1987–88, the state returned roughly $1.1 billion to taxpayers. The limit then faded into the background for decades, until pandemic-era revenue brought it back into play. In 2020–21, the state returned approximately $2.8 billion through the Golden State Stimulus program. In 2021–22, another $6 billion went out through a second round of stimulus payments. Those rebate programs served the dual purpose of economic relief and Gann Limit compliance.

By 2023–24, revenue declines gave the state roughly $15 billion of room under the limit, making the cap a non-factor in that year’s budget negotiations.¹⁰ Projected operating deficits in subsequent years suggest the limit is unlikely to bind again soon, though a sustained recovery could change that quickly.

Emergency Spending Is Treated Separately

The limit does not force governments to leave disasters unfunded. Article XIII B, Section 3 carves out a separate path for spending during declared emergencies such as fires, earthquakes, and floods.¹¹

When a local legislative body declares the emergency, the local government can exceed its appropriations limit, but the limit must be reduced over the following three years by an equivalent amount. When the Governor declares the emergency, appropriations to an emergency account for that disaster are fully exempt from the limit, provided the affected government’s legislative body approves the spending by a two-thirds vote. The Governor-declared route does not require reducing future limits, which makes it the more powerful tool.

Why the Gann Limit Matters for California Taxpayers

For most of the last three decades, the Gann Limit sat in the background. The pandemic-era revenue surge changed that. When capital gains and income tax withholding spiked in 2020 and 2021, the state bumped against the ceiling for the first time since the late 1980s, and the resulting stimulus payments were partly a policy choice and partly a constitutional obligation.

The practical implication for California residents is straightforward. When the economy runs hot enough to push state tax collections above the limit, expect some combination of rebate checks, temporary tax reductions, and increased school funding. When revenue falls short of the cap, as it has recently, the limit does nothing and the budget conversation moves on without it.

1
Ballotpedia. California Proposition 4, Government Spending Gann Limit Initiative (1979)
2
California Legislative Information. California Constitution Article XIII B
3
City and County of San Francisco. FY2025-2026 Resolution
4
California State Assembly Committee on Revenue and Taxation. Government Appropriations Limit
5
Justia. California Constitution Article XIII B Section 9
6
Justia. California Constitution Article XIII B Section 8
7
Justia. California Government Code 7900-7914
8
Justia. California Constitution Article XIII B Section 2
9
Ballotpedia. Article XIII B, California Constitution
10
Legislative Analyst’s Office. The 2023-24 Budget Overview of the Spending Plan
11
Justia. California Constitution Article XIII B Section 3