The Distributional Effects of New Jersey's Tax and Expenditure Limitation

Abstract

When state governments issue general rules that dictate the spending or tax policies of varied local municipalities, they distort local government outcomes. One example of this is state limitations on local government authority to levy taxes and make expenditures. Although state-imposed tax and expenditure limits (TELs) have been used throughout much of the United States's history, they have recently stimulated attention in both the mass media and the academic press. In practice, TELs can be divided into limitations on the authority of local governments to (1) make expenditures and (2) collect property taxes.' According to a 1981 tabulation of the Advisory Commission on Intergovernmental Relations (ACIR), (reprinted in Gold [1983] p. 112), 46 states had some kind of limitation on local (County, Municipal, or School) governments' ability to collect property taxes and 6 states imposed general expenditure limitations on local governments. Many of these controls are quite recent in origin. In fact, all but 18 of the 46 states with property tax limits enacted them after 1970 (though some may have had earlier laws restricting the use of the property tax), and all of the general expenditure limits were enacted after 1970. A particularly rapid wave of TELs followed California's approval of Proposition 13, which reduced property taxes there to one percent of assessed value in June 1978. In November 1978, just five months after Proposition 13 was approved, voters in Alabama, Michigan, Nevada, and Texas approved legislation or constitutional amendments that reduced the authority of local governments to raise taxes.2 While many TELs set maximum property tax rates and expenditure limits that do not appea to have much effect on the behavior of l cal governments, others such as those in California, Massachusetts, and New Jersey do a pear to be binding on many localities. Several r cent studies have attempted to empirically measure the effects of TELs.3 The most well known of these studies is a 1977 ACIR study that used a dummy variable indicating the pres nce or absence of property tax rate and/or levy limits along with other independent variables to explain total per capita, local, own-source, government expenditures in each of the 50 states. Primarily because the estimated parameters of these dummy variables were negative and significantly different from zero, the ACIR concluded that TELs have reduced government spending. Further analyses showed the average TEL reduced spending 6 to 8 percent. Inman's (1979b) paper which used fiscal year 1966-67 data also employed dummy variables to indicate the presence or absence of various kinds of tax rate limits but used data disaggregated at the city level. Inman found a positive and insignificant coefficient on all dummy variables and concluded that efforts to regulate local taxation in 1967 through