Tax Limitations Research Articles

Positive Long-Run Capital Taxation: Chamley-Judd Revisited

According to the Chamley-Judd result, capital should not be taxed in the long run. In this paper, we overturn this conclusion, showing that it does not follow from the very models used to derive it. For the main model in Judd (1985), we prove that the long-run tax on capital is positive and significant, whenever the intertemporal elasticity of substitution is below one. For higher elasticities, the tax converges to zero but may do so at a slow rate, after centuries of high tax rates. The main model in Chamley (1986) imposes an upper bound on capital taxes. We provide conditions under which these constraints bind forever, implying positive long-run taxes. When this is not the case, the long-run tax may be zero. However, if preferences are recursive and discounting is locally nonconstant (e.g., not additively separable over time), a zero long-run capital tax limit must be accompanied by zero private wealth (zero tax base) or by zero labor taxes (first-best). Finally, we explain why the equivalence of a positive capital tax with ever-increasing consumption taxes does not provide a firm rationale against capital taxation. (JEL H21, H25)

An Analysis of the Impact of State Tax and Expenditure Limitations on Indebtedness in the U. S.

An Analysis of the Impact of State Tax and Expenditure Limitations on Indebtedness in the U. S.

Cheating on Their Taxes: When are Tax Limitations Effective at Limiting State Taxes, Expenditures, and Budgets?

Tax limitations (TLs) represent a class of lawmaking that often pits voters against the incentives of their elected representatives. Thus, are voter backed TLs successful in changing state government fiscal behavior? Using agency theory, we discuss how TLs will likely be ineffective at their stated goals in the face of hostile legislative interests. We test the effectiveness of these measures through use of the Synthetic Control Method presented by Abadie, Diamond, and Hainmueller (2010), which allows us to analyze the passage of TLs in each state individually by comparing them to constructed counterfactuals that estimate what constant-level taxes would have been in each state had its TL never been passed. Using this approach, we show that these TLs are almost always ineffective at reducing taxes or expenditures. This result is consistent with recent studies that highlight the ineffectiveness of initiatives. We will argue that the ineffectiveness of TLs is also true generally, for the same reasons that initiatives are typically ineffective in that there is no means for the people to implement, oversee, or enforce the limits and legislatures will often be unwilling to enforce these limitations themselves.

Does the Restrictiveness of State Tax and Expenditure Limitations Affect State Revenues and Expenditures?

This paper examines the impact of tax and expenditure limitations (TELs) on state governments. We examine how TELs are represented in empirical modeling. We compare and contrast an index of state-level TEL restrictiveness to a simple dummy variable approach. We use a panel of data for the 50 U.S. states to capture changes in state TELs and a generalized method of moments (GMM) dynamic panel estimator. We find that results vary across the two methods of capturing the presence of TELs, suggesting that simple dummy variables are not sufficient to capture the heterogeneity of TELs across states and over time.

Tax Limitations and Revenue Shifting Strategies in Local Government

The literature on tax and expenditure limitations (TELs) shows how limiting the freedom of local governments to levy taxes may have considerable unexpected effects. Entities subjected to such limitations may, as their proponents hope, react by cutting expenditures and revenue, but they may also strategically change their revenue structure and increase reliance on income sources not subjected to limitations. However, these findings are overwhelmingly based on studies of state and local governments in the United States. Their relevance outside this empirical setting remains unclear. A study of Denmark, where the central government imposed tax limitations on municipalities in 2009, makes two contributions. First, it probes the empirical domain of the U.S. findings. Second, it constitutes an empirical testing ground where endogeneity is not a pressing concern. In the United States, TELs are often self‐imposed either by local legislatures or by citizens through voter initiatives, which may bias the correlation between TELs and tax rates. We analyze a dataset of all Danish municipalities from 2007 to 2011 and demonstrate that TELs do indeed stop taxes from increasing but also confirm the findings from the TEL literature that entities subjected to tax limitations employ revenue‐shifting strategies. In Denmark, however, these strategies are contingent on the specifics of the Danish intergovernmental system, which render central government grants an attractive object of revenue‐shifting strategies. Our analysis thus helps identify the scope conditions of core findings within the literature.

Indiana's Property Tax Caps: Old Idea, New Approach, and Surprising Incentives

Property tax limits are a subject of continual interest among policy makers. Indiana recently implemented tax caps that limit individual property tax burdens to a fixed percentage of market value. The resulting system creates structural deficits that depend on the simultaneous spending choices of all overlapping local governments. This paper highlights the many unusual incentives which spring from this approach to limiting property taxes. For example, we argue that the interdependence of local governments subjected to the caps creates a pro-spending bias. Policy simulations with Lake County are employed to demonstrate the relevancy of the concerns, and the difficulty of eliminating deficits even with large property tax reductions.

Local Property Tax Limitations vs. School District Employee Pension Costs in Pennsylvania

In Pennsylvania as in many other states, employee pension costs are a significant source of financial pressure for school districts. In order to gain greater insight into the nature of Pennsylvania school districts’ financial burden related to pension commitments, this article presents the findings of two scenarios, one which compared the maximum amount of local property tax revenue Pennsylvania school districts could raise under a 2010 state property tax limitation statute, Act 120, to their pension obligations; and a second scenario which incorporated a 1% annual salary increase into the analysis. The article is divided into three sections.

Cross-Border Charitable Giving and Its Tax Limitations

In this article, the authors examine the tax treatment of cross-border charitable contributions in selected countries, under EU law and in tax treaties.

Tax Mix Corners and Other Kinks

AbstractThis paper models the local tax mix determination process in the presence of statewide fiscal limitations—the decentralized government finance archetype—and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly termed “flypaper effect”) arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending. An empirical application to Italian province panel data provides consistent evidence of the role of corner solutions produced by two-sided tax limits in explaining the sensitivity of local public expenditures to grants.

Do Tax and Expenditure Limits Hinder the Condition of Public Infrastructure? The Case of the Nation’s System of Bridges

Tax and expenditure limitations (TELs) imposed on state and local governments is a popular policy approach to limit the growth in government. At the same time these limits may hinder the ability of state and local governments to provide services and make investments in public infrastructure. We test the relationship between state-level TEL restrictiveness and the United State’s network of highway bridges. We generally find that more restrictive TELs have a weak negative impact on the percentage of bridges deemed structurally deficient but a positive impact on the percentage of bridges deemed functionally obsolete. The states with the most restrictive TELs, those that restrict both revenues and expenditures, tend to have a smaller share of their bridges that are either structurally deficient of functionally obsolete.

TAX LIMIT REPEAL AND SCHOOL SPENDING

This is the fi rst study to evaluate the effects on school spending of repeal of constitutional property tax levy limits. While several studies report that the imposition of tax limits constrains local government and school district spending, this study fails to reject the null hypotheses that tax limit repeal in New York State induced no signifi cant immediate or gradual impact on the average spending of either all districts subject to tax limits or districts that were spending at their limits. The latter fi nding suggests that these “at limit” districts were not constrained by tax limits, either because the desired spending levels were exactly “at limit,” or because the limits were no longer binding after the districts utilized other non-property tax revenues such as state aid, especially from the supplemental Hurd aid program.

The limits of tax and expenditure limits: TEL implementation as a principal-agent problem

Previous scholarship has shown that Tax and Expenditure Limits (TELs) often fail to constrain government growth. This paper views the implementation of TELs as a principal-agent problem. Agency theory predicts that delegation is affected by the preferences of agents and the costs of monitoring those agents. Using panel data for the US states from 1970 through 2008, I conduct an empirical test of the validity of the principal-agent model for TELs. I find that state spending limitations are only effective at cutting the growth of state and local spending under the direction of agents who have a preference for limited government. Additionally, state property tax limitations are only effective when monitoring does not require costly coordinated action. These findings contradict an alternative theory of TEL implementation that looks towards the policy’s origin. My research suggests that the arrangements of delegation determine when and under what conditions TELs effectively reduce government growth.

Tax Limits and Local Democracy

Based on a theoretical model where state limits on local government policy elicit a move from private value (position issue) to common value (valence issue) voting, I exploit exogenous variation in tax limitation rules in over 7,000 Italian municipalities during the 2000s to show that fiscal restraints provoke a fall in voter turnout and number of mayor candidates, and a rise in elected mayors’ valence proxy and win margins. The evidence is compatible with the hypothesis of hierarchical tax limitations fading the ideological stakes of local elections and favoring valence-based party line crossing, thus questioning the influential accountability postulate of the fiscal decentralization lore.

2012 Florida Constitutional Amendment 4: Property Tax Limitations; Property Value Decline; Reduction for Nonhomestead Assessment Increases, Delay of Scheduled Repeal

In addition to 2012 being a presidential election year, Florida voters also will be asked to vote on a number of proposed amendments to their state constitution. Many voters remain either unaware or less informed regarding the effects and impacts of the proposed constitutional amendments. This document is one of a series of 6 fact sheets that was written by Rodney L. Clouser and published by the UF Department of Food and Resource Economics, July 2012.

Impact of State-Level Tax and Expenditure Limits (TELs) on Government Revenues and Aid to Local Governments

This article investigates the impact of state-level tax and expenditure limits (TELs) on state government revenues and aid to local governments. Using an instrumental variable approach to control for endogeneity, the authors find that the general fund TELs (i.e., revenue and expenditure limits) have led to substantial increases in tax and nontax revenues. States with procedural limits (i.e., those with voter approval and/or legislative supermajority requirements votes) have significantly lower tax revenues. For states with these procedural limits, their ability to impose new or higher taxes is limited by the rules for passing such legislation. This study also finds that states with general fund TELs have higher levels of aid to local governments, while those with procedural TELs have lower levels of aid. Local government property tax limits do not have any impact on taxing authority of states and have only marginal impacts on the state-aid programs.

Spatial dependence in constitutional constraints: the case of US states

Several theories suggest that states’ choices of constitutional rules are at least partially a function of neighboring constitutions. This paper provides the first analysis of spatial dependence of specific provisions within state constitutions in the United States. The analysis effectively makes constitutional rules endogenous, contributing to a relatively underdeveloped branch of constitutional economics. By employing a series of probit estimations of nineteen specific constitutional rules, I find evidence of spatial dependence in state constitutions. Specifically, the presence of specific constitutional constraints pertaining to term limits, supreme court justice selection, recall, home rule, direct democracy, constitutional amendment by convention, balanced budget requirements, tax and expenditure limits, line item veto, victims’ bill of rights, health and welfare, right to privacy, environmental protection, sex discrimination, abortion, and official language all exhibit some evidence spatial dependence.

Municipal fiscal stress and the use of Tax Increment Financing (TIF)

The Lead Paper in this policy and practice discussion begins by describing the current fiscal conditions of American cities and the constraints they face in financing both operation and capital expenditures. In particular, it comments on the effects of fiscal stress, tax limits, and state-imposed mandates. It then closely examines the use of tax increment financing (TIF) - a technique that is used by sub-state localities in all but one of the US states. After describing the steps in implementing a TIF district, the article examines the effects of its use, including its impact on redevelopment, new economic development, and on other jurisdictions. Fiscal stress Many American cities are still struggling with the effects of the latest economic recession, which lasted from December 2007 until June 2009 (Hoene and Pagano, 2010). The long downturn became a litmus test of the health of local budgets and revealed important structural and institutional settings in which city governments make revenue and expenditure decisions. A vast majority of American cities rely on property taxes, local sales taxes, user fees and, less often, on income taxes for their budget revenues. While income taxation is typically the federal and state prerogative in the US, some jurisdictions that do not enjoy a rich property or sales tax base use local income taxes as a revenue source. Added to the own-source revenues are intergovernmental transfers, which largely come to localities from states. Intergovernmental transfers are often earmarked for specific programmes, although some state aid goes directly into the General Fund. In 2008, state aid to local governments amounted to 30.5 per cent of total local revenues while federal aid was at the level of 3.8 per cent (calculated by authors from the US Census Bureau data). In 2009, the federal government implemented the American Recovery and Reinvestment Act (ARRA) and disbursed billions of dollars to local education programmes, transportation and construction projects. These programmes and projects would not have been undertaken or would not have withstood the economic recession in the absence of the federal support. The ARRA fund disbursement ended in 2011. The recession demonstrated that changes in economic conditions weaken all major sources of municipal own-source revenue. Usually, income elastic sources, such as sales tax and user fees and charges, are the first to reflect an economic recession. They generate smaller revenue collections as soon as the consumer confidence weakens and income growth stalls. The latest recession, for example, led to a free fall of sales tax revenue for months and resulted in sustained fiscal stress. Revenue from city sales taxes declined by 6.6 per cent from 2008 to 2009 and were forecasted to decline by an additional 4.9 per cent in 2010 (Hoene and Pagano, 2010). Property tax collections, a traditionally stable local revenue source, have also not been immune to the negative effects of the economic downturn. The American housing market crisis triggered a decline in property market values. The latter gradually led to a decline in property assessment values, which in turn affected property tax collections. The trickle-down effect of the housing market crisis may take from 18 months to 2 years before it is reflected in local budgets (Hoene and Pagano, 2010). Unlike sales tax and user fee collections, property tax revenues slowly bounce back to the pre-crisis level when the local economy fully recovers. Structural changes that have taken place in the housing market will not permit property values to rise to the pre-crisis level for many years. Insufficient property tax collections mean that local governments need to look for alternative sources of revenue or raise property tax rates or assessments to balance their budgets. Not many governments freely enjoy the latter option today. Some cities perform assessment valuations biannually and are hesitant, for political reasons, to raise property tax rates. …

Property Tax Initiatives in the United States

This study reviews the history of property tax initiatives in the United States. Majorinitiatives include California's Proposition 13, Florida's "Save Our Homes" amendment,and Massachusetts' Proposition 2½. Enacting some type of limitation is most appealingwhen taxpayers feel overtaxed and underserved. There is some evidence to show thattax and expenditure limitations do bring local governments more in line with voterpreferences. Tax limitation initiatives are often funded by vested special interests and arenot pure grassroots movements. Studies show that tax limitation initiatives have a negativeeffect on education through lower teacher salaries and lower student test scores. Studiesalso show that other public service areas such as fire protection are also negativelyaffected.

The effects of tax and expenditure limitation (TEL) stringency on the level of state expenditure and revenue

This article employs a state and local tax and expenditure limitation (TEL) stringency (restrictiveness) index to examine the effects of TEL stringency on the levels of total expenditure, direct general expenditure, total own source revenue, and general own source revenue by analyzing a panel dataset of the 48 contiguous US states for 1977–2006. The findings indicate that a more stringent state TEL results in a reduction in total state spending. However, it does not reduce direct general spending. The findings also show that a more stringent state TEL does not lead to a reduction of state revenue collection. The findings suggest that the level of stringency of a state TEL has little or no effect on the level of either state expenditure or revenue, confirming results from previous literature that state TELs are largely ineffective in controlling state budgets. Points for practitioners The findings of this study provide important policy implications for professionals working in public management and administration. Politicians and state government officials need to reconsider enacting state TELs to use as a tool for the reduction of the size of state government because the findings in this study clearly indicate that a more stringent state TEL does not result in a reduction of state expenditure or revenue. This study and others suggest that state TELs are largely ineffective in controlling expenditure and revenue levels. However, local TELs are quite effective, and thus, policy coordination must follow in designing appropriate state and local TELs.

TAX‐LIMITED REACTION FUNCTIONS

SUMMARYThis paper models for the first time a spatial process in local tax policies in the presence of centrally imposed fiscal limitations. Focusing on the frequently encountered case of a tax rate cap, we evaluate three empirical approaches to the analysis of spatially dependent limited tax policies: (i) a Bayesian spatial approach for censored dependent variables; (ii) a Tobit corner solution model augmented with a spatial lag; (iii) a spatial discrete hazard model. The evidence arising from an investigation of severely state‐constrained local vehicle taxes in Italy suggests that ignoring tax limitations can lead to substantial underestimation of inter‐jurisdictional fiscal interaction. Copyright © 2011 John Wiley & Sons, Ltd.