Using a Barro-type empirical growth framework we explore the relationship between tax and expenditure limitations (TELs) and the economic growth of U.S. states. The model uses a panel of annual data for the 50 states from 1990 to 2010, with a variable parameter specification coupled with a dynamic Generalized Method of Moments (GMM) panel estimator. In general, more restrictive tax and expenditure limitations can influence the growth process; however, this relationship varies over levels of income and type of TEL.

Employing a unique index of Tax and Expenditure Limitation (TEL) restrictiveness, we estimate a family of economic growth models using a panel of the 50 U.S. states for the period 1969 to 2005. Our central goal is to assess the relationship between TEL restrictiveness and economic growth. Results suggest that stronger TELs imposed on state governments have a dampening effect on state economic growth and TELs imposed on local governments have a weak negative impact on growth. The results do not support the argument that legislatures can use tax and expenditure limits as a mechanism to promote economic growth.

The impact of state tax and expenditure limitations (TELs) on bond credit ratings is estimated using an incomplete (or unbalanced) panel from the US states from 1973 to 2005. Three indices of the restrictiveness of TELs are used. Both Moody's and Standard and Poor's bond credit ratings are used and the outcomes compared. The results are consistent with previous work; more restrictive revenue TELs are associated with lower credit ratings while expenditure TELs are generally associated with higher credit ratings. TELs restricting both revenues and expenditures are negatively associated with Moody' ratings, but not with those of Standard and Poor's. Contrary to previous studies, the authors find limited differences in the fiscal and economic variables that influence the ratings of the two agencies.

To help policy makers manage expenditures during periods of economic downturns, most states have formal budget stabilization funds and unreserved fund balances. Using indices of tax and expenditure limitations laws restrictiveness, we examine the relationship between tax and expenditure limitations and state reserves for years 1992–2010 to help determine the extent to which tax and expenditure limitations constrain or in other ways affect how states manage fiscal reserves. This time period is particularly relevant because it includes two recessions and most states had budget stabilization funds and tax and expenditure limitations. Findings suggest that state-constructed tax and expenditure limitations have little effect on state capacity to react to fiscal shocks.