The Effect of Tax and Expenditure Limitations on Revenue Volatility: Evidence from Colorado

We test a positive model of government spending and savings, where jurisdictions seek to stabilize spending growth and where revenue growth and savings are assumed to be continuous‐time stochastic processes, the Dothan–Thompson optimal budget model. Our empirical tests address two reduced‐form specifications derived from this model, each applied to two different subsets of municipalities. For each of the two specifications, we first estimated models using data for all available municipalities (more than 20,000) covered by the U.S. Census government finance data, and then tested them again on a much smaller balanced subset of the full panel. We find that municipalities do not, on average, optimally stabilize spending in the face of revenue volatility, nor do they consistently use savings to do so. There is, however, at least modest statistical evidence that savings reflect revenue volatility at typical levels of volatility. For all model specifications tested, the single greatest determinant of savings at the municipal level is the state in which the municipality is located. The next challenge is to identify and measure the impact of the underlying factors that explain the dramatic state‐to‐state differences observed in municipal savings patterns.

“…There is lot of financial analysis left to do here (see Clair 2012;Hendrick and Crawford 2014;Marlowe 2012;Srithongrung and Kriz 2014). We have merely scratched the surface.…”

Section: Conclusion and Discussionmentioning

confidence: 99%

Is a Good Normative Model of Public Spending Run Backward a Good Positive Model?

Thompson¹,

Pierson²,

Hand³

et al. 2016

“…However, there is an increasing acknowledgment among state policy analysts and practitioners that focusing on growth provides an incomplete picture of the financial stability of the states. While growth is important, volatility has been argued to be equally as important (Crain ; St. Clair ). Studies that examine volatility have provided evidence that high volatility is associated with lower levels of economic growth (Ramey and Ramey , ; Hnatkovska and Loayza ) in addition to having significant effects on labor markets (Crain ).…”

Section: Introductionmentioning

confidence: 99%

“…Studies that examine volatility have provided evidence that high volatility is associated with lower levels of economic growth (Ramey and Ramey , ; Hnatkovska and Loayza ) in addition to having significant effects on labor markets (Crain ). Volatility is also important for state lawmakers to consider since stability in revenue streams provides state policymakers with consistent and predictable levels of revenue with which to plan (St. Clair ), while highly volatile revenue streams can be seen as the enemy of efficiency (Crain ). However, there has been little empirical work which examines how TELs may affect state financial planning and budgeting through their impact on state revenue volatility (St. Clair ).…”

Section: Introductionmentioning

confidence: 99%

“…Volatility is also important for state lawmakers to consider since stability in revenue streams provides state policymakers with consistent and predictable levels of revenue with which to plan (St. Clair ), while highly volatile revenue streams can be seen as the enemy of efficiency (Crain ). However, there has been little empirical work which examines how TELs may affect state financial planning and budgeting through their impact on state revenue volatility (St. Clair ).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The Effect of TELs on State Revenue Volatility: Evidence From the American States

Staley¹

2015

Stable revenue flows in the American states are paramount for state policymakers in order to effectively and efficiently provide goods and services to their constituents. However, there has been very little empirical work which examines what political factors are correlated with volatility in state revenue streams. This work examines one wide‐spread fiscal limit, tax and expenditure limitations, which a majority of states began adopting after the tax revolt of 1978. Using panel data and time‐series cross‐sectional analysis, this work finds that states with more stringently binding tax and expenditure limitations—in addition to other political, demographic, economic, and geographic factors—are associated with greater levels of state revenue volatility. Looking at 48 states over 37 years (1969–2005), this relationship is both statistically and substantively significant.

“…The literature on tax and expenditure limitations (TELs) reveals how limiting the freedom of sub‐central government to levy taxes may have considerable unexpected effects (Skidmore ; Mullins and Wallin ; Kousser, McCubbins, and Moule ; Bae, Moon, and Jung ; St. Clair ). As their proponents hoped, entities subjected to such limitations possibly react by cutting spending and revenues, but they may also strategically change their revenue structure and increase their reliance on income sources not subjected to limitations.…”

Section: Introductionmentioning

confidence: 99%

Tax Limitations and Revenue Shifting Strategies in Local Government

Blom‐Hansen

Bækgaard

Serritzlew

2014

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.