Examining the fiscal impact of tax and expenditure limitations on municipal governments: a rule design approach

Abstract

ABSTRACT The effect of state fiscal restrictions on local governments is often debatable. While the institutional heterogeneity of such controls is often thought to generate variations in outcomes, more theoretical and empirical attention is imperative. This study aims to address the needs with a particular focus on state-imposed tax and expenditure limitations on municipal governments (municipal TELs), one of the long-standing forms of state pre-emption in the United States. Specifically, it adopts a rule design approach to institutions to capture different institutional designs of municipal TELs, and disentangles their impacts on municipal revenues and expenditures. The results of this study extend the extant literature, suggesting that the fiscal impact of municipal TELs, and more broadly fiscal restrictions, is dependent upon their rule design rather than their presence or stringency.