Does the Stringency of State Tax and Expenditure Limitations Discourage Political Manipulation in Fiscal Reserves?

Abstract

AbstractThis article examines how state tax and expenditure limitations (TELs) affect the size of fiscal reserves over election cycles. Using a panel data set of 47 U.S. states from 1986 to 2013, we find that the persistent pattern of electoral cycles in general fund balances (GFBs) disappears in states with stricter TELs. Regarding a budget stabilization fund balances (BSFs), the preelection and election downward effect diminishes and becomes statistically insignificant while the postelection upward effect increases and becomes significant in states with stricter TELs. Our findings reveal that the stringency of TELs not only eliminates electioneering's impact on GFBs but also coincides with increases in BSFs, particularly in postelection years. Consistent with the principal–agent theory, politicians tend to use a budget stabilization fund (BSF) as a secondary saving account to circumvent stronger TELs and save more BSFs after elections.