Starving counties, squeezing cities: tax and expenditure limits in the US

Abstract

Policy Highlights We create a 50 state Tax and Expenditure Limits (TEL) severity index by government type. Counties and municipalities differ in their revenue structure and economic functions. TELs constrict counties’ ability to raise revenue. Municipalities broaden revenue sources and debt in response to TEL severity. State aid needs to increase for counties to offset TEL’s restrictive effect. State-imposed local Tax and Expenditure Limits (TELS) are restricting revenue raising ability of local governments across the U.S. We create a 50-state index to measure the severity of TELS by type of tax limitation (rate limit, tax ceilings, etc.) for each type of local government: county, municipality and school district. We find in states with more restrictive TELs, counties are more restricted, while cities reduce their property tax dependence and shift to alternative revenue sources and incur more debt. State aid does not make up the difference. TELs increase stress for all local governments but are most severe for counties.