Bureaucratic responses to tax limitation amendments

Abstract

In recent years government budgets in the U.S. have grown at unprecendented rates, particularly at the state and local levels. Perhaps provoked by this spending record, and by the overwhelming approval of California's Proposition 13 (a limit of property tax rates), several states have adopted tax/ spending limits. Activities are proceeding in many other states, and even at the federal level, which would lead to some form of budgetary control. These amendments vary in terms of scope and interest, but their essential purpose is to give voters the right to determine the upper limits to the size of government budgets. Supporters of tax limitation amendments (TLAs) maintain that voter preferences are not accurately reflected in the actual decision-making process. Recent theoretical and empirical work on the economics of state and federal bureaucracy generally support the advocates' characterization [1, 7, 8]. These studies indicate that because of the institutional structure surrounding government decision-making, bureaucratic production tends to result in a level of government goods expenditure exceeding the desired level. A TLA is designed to solve this problem, or so supporters contend, by imposing a ceiling on the spending level. In this paper, we analytically address this intuitively plausible contention. Given the premise that bureaus are monopoly suppliers, a primary purpose of this paper is to outline those circumstances where a TLA will, and will not, make taxpayers better off.1 The effect of a TLA on voter welfare is largely a function of the bureaus' response to the budget ceiling. Of course, the arguments in the bureaucrats' utility function will help shape the bureaus' reaction. Over the last decade, bureaucracy theory has advanced in the direction of explicitly applying traditional utility maximization principles to bureaucratic behavior. William Niskanen's early work posited that bureaucrats simply attempt to maximize the size of their budgets [6]. Noting that this approach unduly delimits the range of utility-maximizing activities, Jean-Luc Migue and Gerard Belanger