Tax And Expenditure Limitations Research Articles

Political budget cycle and unfunded pension liabilities in states in the USA

IMPACT Evidence shows that gubernatorial elections affect pension funding in US states. Contrary to expectations, this article shows that pension plans in election and post-election years tend to be better funded. Other political factors, such as partisanship and unionization, also play a role in funding state employees’ pension plans—the higher the level of unionization, the lower the pension funding. Institutional factors, including tax and expenditure limits (TELs), ‘rainy day funds’ (RDFs), and balanced budget requirements (BBRs), also affect pension funding. TELs positively affect pension funding, while the level of RDFs and the stringency of BBRs tend to reduce pension funding. These findings caution state fiscal administrators and state-level policy-makers as they indicate that political factors along with fiscal institutions are important to consider for their long-term impacts on the viability of pension plans. This article informs policy-makers in the USA and in other countries to exercise more caution during election years as electoral politics may affect pension funding. Political factors are critical in making fiscal decisions, and while this study focuses on the USA states, the lessons are equally important for pension administrators and policy-makers in other countries.

Are Tax and Expenditure Limits (TELs) Effective in Constraining Government Budgets? A Meta-Analysis

Tax and expenditure limits (TELs) are an important fiscal institution for policymakers to restrain government taxing and spending. However, traditional theories have proposed different hypotheses about the effectiveness of TELs, and empirical studies have not been able to reach a consistent conclusion. In this article, we employ a meta-analysis to synthesize existing empirical evidence and explore why different studies find different results on the effect of TELs on state and local budgets. Our meta-analysis results show that TELs are associated with small but significant decreases in both state and local revenue and expenditure. The findings from a subsequent meta-regression analysis add to the TEL literature by showing that the design features of TELs, types of revenue, and level of government can all contribute to the observed variations in the effect of TELs on state and local budgets. The conclusion of this study sheds light on the long-standing debate over the impact of TELs and suggests useful ways for policymakers to improve their TEL designs and policies.

The Impact of State Fiscal Preemption on Local Taxing Authorities: A Case of Michigan

This study investigates the impact of state fiscal preemption on local governance structure. Specifically, it focuses on state-imposed tax and expenditure limits (TELs), which constrain local governments’ ability to raise property tax revenues. Using a unique data set on millage rates levied by all local governments in Michigan from 2011 to 2017, the study examines how the state-imposed limitation on local property taxable values affects local taxing efforts. The findings show that the assessment limit results in higher taxing power by cities and special districts. It also indicates local residents’ preferences to be drivers for the greater taxing efforts.

Do tax and expenditure limitations exacerbate rising income inequality?

AbstractIn recent years, there has been a growing body of literature on the determinants of income inequality and a developing literature on tax and expenditure limitations (TELs). This study connects the two and asks the question—to what extent have state fiscal policies such as TELs impacted income equality? Using a panel of states from 1992 to 2010, we find consistent evidence that more restrictive tax and expenditure limitations exacerbate rising income inequality. Whether TELs are intentionally or unintentionally designed for such an effect is unclear, but what is clear is that these limitations placed on state governments limit their ability to implement policies that could have the potential to reduce income inequality.

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

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.

Tax and Expenditure Limitations, Salary Reductions, and Public Employee Turnover

This study examines the relationship between salary and employee turnover behavior by analyzing a natural experiment created by the New Jersey Superintendent Salary Cap (NJSSC), which caused salary reductions for 25 percent of NJ superintendents in the initial year. I find that an additional $10,000 reduction in base salary due to the NJSSC corresponds to a 16 percent increase in the likelihood of superintendent turnover. This suggests salary expenditures are important public policy levers to retain employees. This study also contributes to prior research on tax and expenditure limitations (TELs) by documenting one of the first TELs placed directly on public employees.

New Fiscal Rules for State and Local Government: A Question of Institutional Complementarity

New fiscal rules, referred to as tax and expenditure limits (TELs), were enacted in many states during the tax revolt launched in the 1970s. Over the past two decades a second generation of TELs, patterned after Colorado’s TABOR Amendment, was introduced in the states. The new fiscal rules have had a limited impact in constraining fiscal policy in the states. Many state and local governments are now incurring debt at an unsustainable rate, and citizens have lost confidence in the ability of these governments to pursue prudent fiscal policies. The problem with new fiscal rules enacted in the states is not just design flaws, it is the absence of complementary institutions that are prerequisites to effective fiscal rules. In this study we focus on three institutional reforms: fiscal autonomy for subnational jurisdictions; capital market and legal reforms to restore bankruptcy procedures for state as well as local government; and strengthening institutions of direct democracy to give citizens more ‘voice’ in enacting fiscal rules and pursuing fiscal policies. New fiscal rules are effective when enacted with broad support within the community, and with effective fiscal rules in place citizens can again gain confidence in their state and local governments. Growing this ‘dynamic credence capital’ will be essential for state and local governments to solve the debt crisis.

The Impact of Tax and Expenditure Limitations on User Fees and Charges in Local Government Finance: Evidence from New England

AbstractAmerican local government financing shifted from taxation toward user fees and charges (UFCs) in the late 1970s, with substantial efficiency and equity implications. Normatively, the shift aligns with the benefit principle; positively, the shift is often attributed to tax revolts. We test the two associations via a difference-in-differences design and a fiscal stringency measure of tax and expenditure limitations (TELs); we also test the moderating effects of overrides on TELs. Our results confirm that state-imposed TELs caused the shift in local public finance; the results are robust to change of sample and empirical strategy. This article helps explain the relationship between tax revolts and non-tax revenue and provides evidence that fiscal constraints imposed by a higher level government on a constituent level can have significant effects, including effects beyond the intent of the constraints’ framers.

Do Tax and Expenditure Limits Influence Federal Lobbying by State and Local Governments? Evidence from A Panel Dataset

A large body of literature has emerged regarding the overall effects and efficacy of state and local tax and expenditure limits (TELs). Importantly, much of this literature has detailed some of the unintended consequences of those fiscal constraints. This paper adds to that latter strand of the literature by evaluating the relationship between state and local TELs and the prevalence of federal lobbying expenditures by those governmental units constrained by such a limit. With the inclusion of several different measures of state and local TELs, panel data spanning several years, and various specifications, the results indicate that fiscally constrained state and local governments increase federal lobbying efforts, though the result is far less robust for states. Disaggregation of these TELs suggests little association between lobbying and a revenue limit at the state level (though a stronger positive association exists with expenditure limits), while a property tax limit (expenditure limit) is positively (negatively) associated with lobbying expenditures at the municipal level.

Do Environmental Shocks and Budgetary Constraints on Public Organizations Increase Employee Turnover?

Previous public management and organizational theory literature focuses primarily on the employee- and organizational-level characteristics that influence employee turnover. However, other potential determinants of employee turnover, such as factors external to the organization, are understudied. the current paper addresses this gap in the literature by examining the effect of the interaction between environmental shocks and budgetary constraints on employee turnover. Using a nationally representative teacher-level dataset, this paper tests the hypothesis that, after the passage of the No Child Left Behind Act (NCLB), teachers in states with binding tax and expenditure limitations (TELs) on school districts become more likely to turnover than their counterparts in other states. This paper finds evidence to support this hypothesis. Following the passage of NCLB, a teacher in a state with a binding TEL is 8.7 percentage points more likely to leave the teaching profession relative to all other teachers. This result is primarily driven by those teachers in states without a prior school accountability policy. Overall, this study adds to prior research on public employee turnover, TELs, and school accountability.

Leviathan or Public Steward? Evidence on Local Government Taxing Behavior from New York State

AbstractFiscal federalism argues local governments compete to provide optimal tax-service bundles as responsible public stewards. In contrast, Leviathan theories argue tax and expenditure limitations (TELs) are necessary to make local governments fiscally responsible. We analyze local taxing behavior in New York State, which implemented a levy limit in 2012 that allows legislative overrides with 60 percent vote of the local governing board. Our 2017 survey of all general-purpose local governments measured fiscal stress, service responses, and local political attitudes and found 38 percent of municipalities voted to override. Logistic regressions show local governments that have more fiscal stress, weaker property tax bases, higher need, and higher employee benefit costs are more likely to override. These findings support fiscal federalism, as local governments that override are pushing back against state policy in order to respond to local needs. TELs introduce unnecessary rigidity and run counter to the precepts of fiscal federalism.

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

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.

Local Property Tax Limits in Nebraska: Within-State Variations in Effects

Tax and expenditure limitations (TELs) have been widely imposed on state and local governments. A substantial amount of research has been conducted on the effects of TELs, however, most have assumed that a TEL is equally binding on every local government in the state. This may not be the case; the degree to which a TEL constrains a jurisdiction is dependent on its position and context at the time of the TEL implementation, and, further, the responses of these governments might then be expected to be different over time. This study uses data for counties and special purpose districts in Nebraska, where property tax limits became effective in FY1999; we consider a variety of intended and unintended consequences over the 15 years under the limit. Our findings show the fiscal responses to and effects of the limits and how they vary between county governments that were more versus less restricted.

The Impact of Tax and Expenditure Limitations on Municipal Revenue Volatility

Stable revenue flows are paramount for policy makers at all levels of government in order to effectively and efficiently provide goods and services to constituents. This work examines the relationship between tax and expenditure limitations (TELs) and municipal revenue volatility. The current literature suggests that more stringently binding TELs at the state level are associated with greater levels of revenue volatility. This work tests whether this finding extends to the local level of government as well. Examining ninety-nine municipalities over eight years (2004–2011), this work provides evidence that the stringency level of TELs is associated with reduced fluctuations in municipal revenue streams.

Effects of State-Imposed Tax and Expenditure Limits on Municipal Revenue Reliance: A New Measure of TEL Stringency with Mixed Methods

How state-imposed tax and expenditure limits (TELs) affect municipal revenues depends on both the terms the limits and the municipal revenue level. The majority of TEL literature assumes that the same TELs have the same stringency for municipalities with varying property tax efforts. I construct a “TEL gap” measure that accounts for different maximum allowable rate for property tax growth across states and incorporates different levels of the actual levies across municipalities within a state. Using a sample of 100 large cities in the United States from 1995 to 2011, this study examines the effects of TELs on revenue reliance by source and shows that cities with more restrictive TELs do not have higher reliance on non-property-tax revenues. In a sample that includes only cities with TELs, the results suggest that cities subject to more restrictive TELs rely more on sales taxes and less on user fees.

Is there a relationship between TELs and default? Evidence from US municipalities

AbstractThe economic effects of tax and expenditure limits (TELs) have been often studied in the literature. However, little research has addressed how TELs might influence the propensity for a jurisdiction to default on its obligations. This study specifically fills that void. Overall, the results indicate that while the likelihood of default increases as TELs become more restrictive, the magnitude is not particularly large. Once decomposed, it would appear that property tax limits increase the likelihood, while expenditure limits have the opposite effect, though the latter result is insignificant. The findings are robust to a number of specifications and provide potential policy implications.

Tax and Expenditure Limitations and Special District Formation

This paper empirically examines the formation of special districts in the United States. It investigates, in particular, the adoption of tax and expenditure limitations (TELs) on local governments to determine how the have motivated special district formation. The paper extends the research agenda by reporting a longitudinal analysis for TELs and special district formation through the post-Proposition 13 tax revolt in the states. Theory from the literatures on special-purpose governments and, on TELs, guides the research – literatures interested in the impact of fiscal institutions on local government reorganization. Main findings are that adoption of one type of TEL – general limitations – is encouraging formation of special districts with taxing powers. Substantively, adoption of general limitations raises the number of taxing districts by approximately 13 percent. A flexible model for panel data, inclusive of fixed effects and time trends, turns out to be crucial for identifying estimates for the impact of TELs in special district formation.

Tax and Expenditure Limitations and Special District Formation

This paper empirically examines the formation of special districts in the United States. It investigates, in particular, the adoption of tax and expenditure limitations (TELs) on local governments to determine how the have motivated special district formation. The paper extends the research agenda by reporting a longitudinal analysis for TELs and special district formation through the post-Proposition 13 tax revolt in the states. Theory from the literatures on special-purpose governments and, on TELs, guides the research – literatures interested in the impact of fiscal institutions on local government reorganization. Main findings are that adoption of one type of TEL – general limitations – is encouraging formation of special districts with taxing powers. Substantively, adoption of general limitations raises the number of taxing districts by approximately 13 percent. A flexible model for panel data, inclusive of fixed effects and time trends, turns out to be crucial for identifying estimates for the impact of TELs in special district formation.

The unintended impact of tax and expenditure limitations on the use of special districts: the politics of circumvention

The increasing trend of special districts deserves more attention as it raises concerns on the efficiency and accountability of the fragmented local governance system in America. This paper examines whether the rapid growth of special districts can be partially explained by the expansion of state-imposed tax and expenditure limitations (TELs) during the last several decades. Using panel data from 1972 to 2007, this paper finds that TELs produce unintended circumvention effects among local governments. Specifically, the results reveal TELs motivate local general-purpose governments to create new special districts as an institutional strategy to evade the fiscal constraints imposed by the state.

Special District Formation: Evidence from Panel Data

This paper empirically examines the formation of special districts in the United States. It investigates, in particular, the adoption of tax and expenditure limitations (TELs) on local governments to determine how they have motivated special district formation. The paper extends the research agenda by reporting an analysis for TELs and special district formation through the post-Proposition 13 tax revolt in the states. Theory on special-purpose governments and, on TELs, guides the research – literatures interested in the impact of fiscal institutions on local government reorganization. Main findings are that adoption of one type of TEL – general limitations – is encouraging the formation of special districts with taxing powers. Substantively, adoption of general limitations raises the number of taxing districts by approximately 13 percent. A flexible model for panel data, inclusive of fixed effects and time trends, turns out to be crucial for identifying estimates for the role of TELs in special district formation.