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

Abstract

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 Downloaded from 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.Keywords tax and expenditure limits (TELs), state government revenues, intergovernmental relations, instrumental variablesThe effect of tax and expenditure limitations (TELs) on government spending has been theoretically debated and empirically tested since the early adoption of TELs. This study contributes to this literature by making three contributions. First, whereas prior studies have focused on the TEL's base (revenue limit or expenditure limit), method of approval (voter initiative, referendum, or a legislative vote), institutional codification (constitutional or statutory), or the fiscal growth factor (personal income or population growth plus inflation), or some combination of the above, this study highlights the importance of understanding how these limits are executed. The relevant construct, and the one we advance in this article, distinguishes between limits on the general fund (i.e., revenue or expenditure limits) and procedural limits on taxing authority (i.e., legislative supermajority or voter approval requirements for new or higher taxes; Kioko 2011; Stark 2001). We find tax and nontax revenues are higher in states with general fund limits, while tax revenues are significantly lower in states with procedural limits. This suggests that imposing new or higher taxes is more difficult in states with procedural limits. We also find aggregating general fund and procedural limits into a single measure, or excluding either of these institutions, could lead to omitted variable bias.Second, we find that the question of endogeneity of these institutions has been largely overlooked. In this study, we attempt to improve upon prior estimates through an instrumental variable approach. A crucial instrument and a critical component of the tax revolt movement are the voter initiative provisions. Robustness tests reveal these to be weak and our examination of the literature suggests these instruments would be relevant explanatory variables. In our alternative instrumental variable specification, we consider the structure of the voter initiative provision...

Local Government Budget Stabilization

“…Our null hypothesis is that our instruments are weak and subject to bias that we find unacceptably large. The F-statistic from the weak identification test is larger than the Stock and Yogo (2005) critical value (13.91) in each of five specifications, an indicator that our excluded instruments are correlated with the 16 Kioko and Martell (2012) found voter initiative provisions were not valid instruments in their study of the impact of state-level TELs. They argue initiative processes have been used to alter the direction of state and local government policies (Waters 2003), as such voter initiative provisions were an important explanatory variable that could be used to not only explain the presence of the endogenous variable, but also have an independent effect on taxing and spending levels.…”

“…Like Rueben (1997), Shadbegian (1999), Knight (2000), Wagner (2004), and Kioko and Martell (2012), I apply an Instrumental Variable (IV) approach to address endogeneity of the policy variables of interest. I specify the IV model as follows:…”

“…Direct legislation includes a broad array of provisions including statutory and constitutional direct and indirect initiatives, legislative referendums and popular referendums. For the purposes of the model specified in this paper, I limit my interest to voter initiative provisionswhether direct or indirect, statutory or constitutional (Boehmke 2005;Kioko and Martell 2012;Waters 2003). requirement, and an indicator variable if the state permitted legislative review of proposed initiatives.…”

Volatile earmarked revenues and state highway expenditures in the United States

“…With respect to state highway spending, Mullins and Joyce (1996, p. 91) found that ''state limits are associated with an initial reduction in the relative level of expenditures made by the state but expenditures tend to regain lost ground over time.'' Following Kioko and Martell (2012), I included a binary indicator of whether a state had a tax and expenditure limit and another dummy variable for voter approval or legislative super majority vote for new or higher taxes. Four widely used BBR-related binary variables specified in I indicate (1) whether a state's governor must submit a balanced budget, (2) whether the legislature must pass a balanced budget, (3) whether the governor must sign a balanced budget, and (4) whether current year-end deficit can be carried over into the next fiscal year (Hou and Smith 2006).…”

A Dynamic Scoring Simulation Analysis of How TEL Design Choices Impact Government Expansion

“…That's a very different issue than how the first generation TELs actually impacted state fiscal outcomes. Our perspective also sets aside the procedural rules issue (Kioko and Martell, 2012); that is, how TEL effectiveness varies with rules for changing a TEL's constraints on revenue or exclusions.…”