Tax and Expenditure Limitations and State Credit Ratings

Abstract

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.

Assessing the Relationship Between Objective and Subjective Measures of Fiscal Condition Using Government‐Wide Statements

“…Johnson, Kioko, and Hildreth found that several measures from the government‐wide reporting (total primary government expenditures financed by business‐type revenues, and total primary government revenues) were associated with state credit rating levels. This result is consistent with other studies that seek to better understand how financial conditions influence credit ratings (e.g., Stallmann et al ). Additional evidence supporting the benefits of government‐wide statements was reported by Wang, Dennis, and Tu (), who developed state‐level fiscal condition ratios from government‐wide financial statements to assess the extent to which the metrics are related to a set of socioeconomic variables.…”

Economic Crises, Economic Structure, and State Credit Quality Through‐the‐Cycle

“…Palumbo and Zaporowski () and Stallmann et al () find a negative association between expenditure limits and credit ratings. Evidence on revenue limits and their relationship with credit quality, however, is negative in Grizzle () and Stallmann et al ().…”

“…Palumbo and Zaporowski () and Stallmann et al () find a negative association between expenditure limits and credit ratings. Evidence on revenue limits and their relationship with credit quality, however, is negative in Grizzle () and Stallmann et al (). Furthermore, Kioko and Martell () suggest additional classifications of TELs by general fund limits (the aforementioned revenue, expenditure, and appropriation limits) and procedural limits.…”

Pushing austerity: state failure, municipal bankruptcy and the crises of fiscal federalism in the USA

“…Restrictions on state expenditures, however, do tend to be rewarded by credit-rating agencies (Stallmann et al, 2012), the assessments of which have assumed increasing significance as states and cities have come to rely on debt-based financing models, while competing as "hostile brothers" for mobile forms of public and private investment (see Gottdiener, 1986;Peck and Tickell, 1994;Sbragia, 1996;Hackworth, 2007). As a result, municipalities have been driven into increasingly risky experiments in fiscal entrepreneurialism.…”