For better or for worse: reassessing the impact of tax and expenditure limitations on state expenditure

Abstract

This study examines the fiscal impact of tax and expenditure limitations (TELs) on state spending by expanding the popular, narrow view of examining TELs and taking into account the scope, purpose, and restrictiveness of individual state TELs. Using an efficient estimator, called fixed effect vector decomposition I employ a set of panel data from all fifty states for the period 1997 - 2006. While a number of studies have been inconclusive about the impact of state TELs on spending, this study finds that having a TEL is not what matters. Rather, the impact of TELs depends on the actual features of the individual TEL. Further, TELs impact different categories of spending in different ways and, under the right conditions, TELs can have the desired impact and effectively reduce state spending.