No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Are tax and expenditure limitations constraining institutions or institutionally irrelevant? Evidence from Minnesota
Abstract
State‐imposed limitations on local government taxation and expenditures (TELs) are a common part of American federalism. But the consequences of TELs are the subject of debate. Are TELs institutional constraints that harm local governments? Or are TELs institutionally irrelevant veils easily pierced by political actors? This research uses the removal of an assessment restriction in Minnesota to evaluate the effect of TELs on the financial health of local governments. It finds that TEL removal had no effect on the financial health of Minnesota cities. Additional tests demonstrate that the results are not driven by a lack of bindingness in the TEL, by increases in property tax rates, or by new non‐property tax revenue. It concludes that TELs are closer to institutionally irrelevant than to meaningful constraints. States regularly impose tax and expenditure limitations (TELs) on their local governments. Many have argued that these limitations harm local government finances by restricting local autonomy. We find little evidence of that harm. Minnesota local governments saw no discernable improvements to their financial health following the removal of an assessment restriction. When focusing only on local governments that were likely bound by the TEL, we still find no clear effect of removing the TEL. We also show that nonproperty tax revenue generation was unaltered by the policy change. State‐imposed TELs may have little to no effect on the financial health of local governments. States regularly impose tax and expenditure limitations (TELs) on their local governments. Many have argued that these limitations harm local government finances by restricting local autonomy. We find little evidence of that harm. Minnesota local governments saw no discernable improvements to their financial health following the removal of an assessment restriction. When focusing only on local governments that were likely bound by the TEL, we still find no clear effect of removing the TEL. We also show that nonproperty tax revenue generation was unaltered by the policy change. State‐imposed TELs may have little to no effect on the financial health of local governments.
In the pursuit of economic growth, the role of innovation has become increasingly important, posing dilemmas for subnational governments as they navigate the balance between expenditure competition and long-term investments in innovation. This study aimed to investigate the intricate relationship between fiscal pressures and the pursuit of innovation goals faced by regional authorities. To achieve this, a systematic literature review was conducted, synthesizing more than 150 studies published within the past 15 years. Keyword searches were conducted across multiple databases, and additional scholarly articles were incorporated through citation tracking. Rigorous qualitative analysis techniques, including inductive coding and thematic analysis, were employed to distill conceptual insights from the literature. The analysis performed in this review reveals extensive discussions regarding the influence of competition on innovation outcomes, encompassing a wide range of perspectives. The potential advantages of localization are emphasized by some viewpoints, while others caution against the risks of inadequate investment. The effective coordination of policies across multiple levels of governance to maximize synergies between national and subnational innovation systems emerges as a complex yet crucial challenge. It is observed that collaborative networks, which facilitate knowledge exchange through industrial clustering and public-private linkages, play a significant role in leveraging regional innovation assets. Strategic approaches that successfully balance competition with long-term capacity development have been demonstrated by leading jurisdictions. These findings highlight the significance of tailored policy frameworks that account for the unique contexts of each region, providing opportunities to harness competitive motivations while sustaining investments in innovation. Ongoing coordination is essential to strike a balance between responsiveness and coherence across diverse territories. This study offers practical guidance and academic insights on strategies to align decentralized imperatives, aiming to optimize prosperity through knowledge creation within evolving multi-level innovation systems. By shedding light on these strategies, the research contributes to both practical and academic understandings of how to effectively navigate and capitalize on the dynamics of such systems.
Recently, Abadie et al. (2015) have expanded synthetic control methods by the so-called cross-validation technique. We find that their results are not being reproduced when alternative software packages are used or when the variables’ ordering within the dataset is changed. We show that this failure stems from the cross-validation technique relying on non-uniquely defined predictor weights. While the amount of the resulting ambiguity is negligible for the main application of Abadie et al. (2015), we find it to be substantial for several of their robustness analyses. Applying well-defined, standard synthetic control methods reveals that the authors’ results are particularly driven by a specific control country, the United States.
This article analyzes the increasing use of state preemption law by conservative state leaders as a tool to rein in progressive local governments. The scope and special qualities of recent state preemption laws are explored by examining legislation preempting local fracking bans, preventing minimum wage ordinances, targeting sanctuary city policies, overturning LGBT rights ordinances, and enacting blanket preemption measures. Reasons for the recent surge of state preemption laws are suggested, and the overall effectiveness of these laws is discussed. I conclude that rising conservative dominance of state legislatures has provided the opportunity to thwart progressive local policies, and these efforts have been aided by various industry and conservative organized groups. State preemption laws are not always successful in their aims. In some cases, state supreme courts have sided with local officials' claims of state overreach. In others, local officials have simply refused to comply. In any case, the threat of preemption may have a chilling effect on local policy innovation.
The literature on tax and expenditure limitations (TELs) is extensive and continues to grow, as the impact of these institutional constraints on fiscal and economic outcomes continues to develop. In this survey, we review the literature of state-and local-level TELs, in an attempt to provide an overview of their theoretical, operational, and empirical contexts. The study concludes with a discussion of future TEL research needs.
During and after the Great Recession, many local governments were compelled to declare fiscal emergencies, lay off workers, and cut services while others weathered the recession without needing to take such actions. In this paper, we construct a measure of fiscal distress using comprehensive annual financial reports, budgets, and media coverage and then use it as a dependent variable to model fiscal distress as a function of past financial performance and socio-economic environment. The empirical models show the relative importance of fiscal reserves, debt, and revenue composition in predicting local fiscal distress.
We propose to expand the theoretical understanding of cutback strategies by investigating the effects of institutional constraints on fiscal outcomes during a period of severe fiscal distress. To test our research hypothesis, this study focuses on a cross-section of municipalities throughout the U.S. during and shortly after the 2008-09 recession. We observed differences in fiscal outcomes based on the severity of the municipal TELs. We find that municipalities in stricter TELs states received more intergovernmental aid, incurred higher debt service expenditures and experienced less net capital investment during the most recent recessionary period. These findings support the argument that tax and expenditure limitations, which are often neglected in discussions of cutback strategies, should be given greater consideration.
The research focuses on the impact of the restrictiveness of tax and expenditure limitations (TELs) on the credit ratings of 566 U.S. municipalities over the 2007-2010 time period. The credit ratings used are by Moody’s rating agency, and municipal fiscal data are drawn from the Government Financial Officers Association’s (GFOA) Certificate of Achievement for Excellence in Financial Reporting program. Results suggest that more restrictive TELs imposed on municipalities by the states have a weak negative impact on credit ratings which will likely force municipalities to face higher interest costs.
The Great Recession of 2008-09 caused an array of fiscal challenges for state and local governments in the US, including the underfunding of pensions and retiree health benefits (Joyce, 2013). It is estimated that in 2009 the 61 largest cities in the US had unfunded pension and retiree health benefits liabilities equal to $217 billion (The Pew Charitable Trusts, 2013). Given these constraints, we are primarily interested in understanding the effects of institutional factors, more specifically the role of tax and expenditure limitations (TELs), on pension and other post-employment benefit (OPEB) funding. Recent studies have examined the effects of pension liabilities on bond ratings (Martell, Kioko and Moldogaziez, 2013), the effects of state budget stabilization funds on pension contributions (St. Clair, 2013) and political and institutional effects on pension plan management (Gehl, Willoughby and Bell 2013); (Chen, Ebdon, Kriz and Laforge, 2013). What is less understood is the role played by institutional structures such as form of government and state-imposed tax and expenditure limitations on pension or OPEB funding before, during and after the recession. Our findings suggest that municipal TELs are statistically associated with OPEB funding, meaning that municipalities with stricter TELs had lower OPEB funding ratios. Just as importantly, we find that during this period, municipalities with mayor-council forms confronted with stricter TELs had better funded pensions and OPEBs than in cities with similar TELs but with manager-council forms of government.
We summarize research addressing the validity of the argument that constitutional constraints such as Proposition 13 could reduce the size of local governments while having little effect on the quality of public services provided. A growing body of research is producing a consistent conclusion; imposition of tax and expenditure limits results in long-run reductions in the performance of public school students. We provide evidence that reconciles these reductions with the dominant result of the education production literature: dollars matter little. Whether limits are good public policy remains an open question, because work remains on the quantification of their costs and benefits.
The intent of this research is determine the extent to which self-reported measures of fiscal condition are consistent with commonly identified measures of fiscal condition using secondary financial data. While the field of government finance has amassed a lengthy list of research on fiscal condition and fiscal stress assessment, there remains a gap in the research on the extent to which practitioners' perceptions of fiscal stress are consistent with such measures. Our results suggest that there is limited evidence of a relationship between self-reported and objective measures of fiscal condition.
The sorting of residential populations among metropolitan area communities and its impact on municipal service bundles is studied across 216 metropolitan areas. There is strong empiricial support for the policy implications of Tiebout's model. The service bundles of metropolitan communities are significantly differentiated. Support for the homogeneous sorting of residential populations is not confirmed, nor is there a significant relationship between the sorting of residential populations and the content of municipal service bundles. State-local relations are examined as a potential constraint on the operation of this aspect of Tiebout's model.
This paper examines the impact of the form of government and state‐imposed property tax limits on municipal finance. We suggest that municipal revenues and expenditures are determined concurrently and estimate revenue and expenditure functions as simultaneous equations. We use the instrumental variable approach and fixed effects to address revenue and expenditure endogeneity. By testing the model on a cross‐section of rich municipal data for fiscal year 2002, we find evidence that revenues and expenditures are simultaneously determined, that potentially binding state‐imposed property tax limits effectively restrict local revenues and that the form of government is a significant predictor of local expenditures.
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 “new public management” (NPM) wave in public sector organizational change was founded on themes of disaggregation, competition,
and incentivization. Although its effects are still working through in countries new to NPM, this wave has now largely stalled
or been reversed in some key “leading-edge” countries. This ebbing chiefly reflects the cumulation of adverse indirect effects
on citizens' capacities for solving social problems because NPM has radically increased institutional and policy complexity.
The character of the post-NPM regime is currently being formed. We set out the case that a range of connected and information
technology–centered changes will be critical for the current and next wave of change, and we focus on themes of reintegration,
needs-based holism, and digitization changes. The overall movement incorporating these new shifts is toward “digital-era governance”
(DEG), which involves reintegrating functions into the governmental sphere, adopting holistic and needs-oriented structures,
and progressing digitalization of administrative processes. DEG offers a perhaps unique opportunity to create self-sustaining
change, in a broad range of closely connected technological, organizational, cultural, and social effects. But there are alternative
scenarios as to how far DEG will be recognized as a coherent phenomenon and implemented successfully.
Building on an idea in Abadie and Gardeazabal (2003), this article investigates the application of synthetic control methods to comparative case studies. We discuss the advantages of these methods and apply them to study the effects of Proposition 99, a large-scale tobacco control program that California implemented in 1988. We demonstrate that following Proposition 99 tobacco consumption fell markedly in California relative to a comparable synthetic control region. We estimate that by the year 2000 annual per-capita cigarette sales in California were about 26 packs lower than what they would have been in the absence of Proposition 99. Given that many policy interventions and events of interest in social sciences take place at an aggregate level (countries, regions, cities, etc.) and affect a small number of aggregate units, the potential applicability of synthetic control methods to comparative case studies is very large, especially in situations where traditional regression methods are not appropriate. The methods proposed in this article produce informative inference regardless of the number of available comparison units, the number of available time periods, and whether the data are individual (micro) or aggregate (macro). Software to compute the estimators proposed in this article is available at the authors' web-pages.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
In 1994, a limit on the growth of property values for tax purposes was imposed in Michigan. One consequence of the newly imposed assessment growth cap was an emerging differential in tax prices between potential new property owners and long-time property owners. The purpose this article is to examine the impact of this growing tax price differential on migration patterns. Using county level data on migration activity over the 1994—2006 period, the authors present evidence that differential tax prices resulting from the assessment growth cap have reduced in-migration.
This report provides detail on the construction of an index of tax and expenditure limitations (TELs) for the 50 US states for the time-frame 1969 to 2005. Separate annual indices are constructed for TELs on state and on local governments. The goal of constructing the indices is to provide a means to test a range of hypotheses concerning the impact of TELs on economic performance and on state and local government fiscal policies. This report documents the construction of the index. The data are provided in Excel spreadsheets so that others may construct alternative indices.
Theories of fiscal federalism, such as those propounded by Musgrave, Tiebout, and Brennan and Buchanan, prescribe assignment of revenue sources among federal, state, and local governments. In this article, we demonstrate that the recent diversification of municipal revenue sources in response to devolutionary forces does not follow the expectations of the fiscal federalism theories. Our analysis suggests that the use of an institutional approach to the study of fiscal federalism would help to reduce the mismatch between theory and reality.
Local governments facing extreme fiscal stress have few options. One that has historically been rare is filing for Chapter 9 bankruptcy. The limited number of cases has prevented systematic study of municipal bankruptcy. But given the results of bankruptcy for individuals, there are reasons to believe that bankruptcy can provide a financial fresh start for local governments. This research leverages six municipal bankruptcies in the years immediately following The Great Recession to explore the effects of bankruptcy on local government financial health. It employs a variety of empirical approaches to generate a counterfactual for the bankrupt governments and assess the effects of bankruptcy: synthetic control, propensity score matching, staggered difference‐in‐differences, and an event study. The results show that bankruptcy is associated with no declines and some meaningful improvements in financial health. These findings suggest that Chapter 9 bankruptcy may provide extremely stressed local governments with a potential path forward.
One of the fundamental questions in democratic governance is whether policies are best decided by elected officials or by appointed bureaucrat-experts. The study examines this issue in the context of how municipal government form influences government-wide budgetary solvency. Government form creates distinct incentives for executive action that shape budget outcomes. In mayor–council governments, the elected executive’s desire to be reelected increases responsiveness to voters’ preferences. Vote maximization incentivizes the adoption of policies that are popular among voters but can lead to budgetary imbalance. In contrast, the appointed executive in the council–manager form is interested in career advancement, which she achieves by building a reputation for leading a fiscally sound government. Insulated from the demands of voters, the manager can rely on expert knowledge and professional norms to choose policies that result in balanced budgets. Using data from audited financial reports for 655 mid-sized and large city governments in the United States from fiscal years 2006 to 2013, the econometric analysis shows that council–manager cities have stronger budgetary solvency compared with mayor–council cities.
The synthetic control methodology (Abadie and Gardeazabal, 2003, American Economic Review 93: 113–132; Abadie, Diamond, and Hainmueller, 2010, Journal of the American Statistical Association 105: 493–505) allows for a data-driven approach to small-sample comparative studies. synth_runner automates the process of running multiple synthetic control estimations using synth. It conducts placebo estimates in space (estimations for the same treatment period but on all the control units). Inference (p-values) is provided by comparing the estimated main effect with the distribution of placebo effects. It also allows several units to receive treatment, possibly at different time periods. It allows automatic generation of the outcome predictors and diagnostics by splitting the pretreatment into training and validation portions. Additionally, it provides diagnostics to assess fit and generates visualizations of results.
Fiscal rules attempt to alter budget outcomes by constraining policy makers. They have been one of the primary responses to the recent string of fiscal crises around the globe. We ask if these rules succeed in altering fiscal outcomes by examining what is arguably the most stringent set of fiscal rules in the U.S.—Colorado's Taxpayer Bill of Rights (TABOR). As TABOR attempts to constrain both taxes and expenditures, we develop a novel approach of estimating treatment effects for multiple outcomes simultaneously using the synthetic control methodology of Abadie et al. (2010). Although there will always be a degree of uncertainty over external validity when a policy is enacted in only a single state, our results provide no evidence that TABOR affected the level of taxes or spending in Colorado and are precise enough to rule out large negative effects. Thus, no support is found for the contention that fiscal rules alter budget outcomes. Instead, TABOR appears to have been partly evaded by policy makers and voters despite its stringency and partly nothing more than a ratification of the state's preference over the size of its public sector.
An unfunded expenditure mandate occurs when governments are required to provide a good or service by a higher level of government without an accompanying revenue source. There are no empirical studies providing causal evidence on the fiscal influence of intergovernmental mandates. This article examines Florida's 1990 constitutional Amendment 3, which sought to limit unfunded state mandates on municipal and county governments. The synthetic control method, an empirical technique for drawing causal inferences from case studies, estimates the effect of Amendment 3 on state expenditures and total transfers to local governments. The results indicate that state expenditures increased by an annual average of 9.5 percent, while state transfers to all local governments were unaffected. However, the municipalities protected by Amendment 3 saw intergovernmental revenue from the state decrease by 10 percent annually, which suggests that remaining mandates likely targeted special districts, encouraging the fragmentation of local public service delivery.
One of the critical questions in local public budgeting and finance is how the confluence of two major developments in the local public sector—the proliferation of tax and expenditure limits (TELs) and the widespread budget crisis precipitated by the Great Recession—has affected local governments across the country. This research examines how TELs shape the fiscal behavior of municipal governments, specifically the pattern of use of different fiscal tools to respond to a major budget crisis. The fiscal tools available to local governments to address fiscal shocks include personnel-related budget cuts, service-related cuts, revenue-raising responses, efficiency reforms, fund balance and inter-fund transfers, external borrowing, and inter-governmental approaches. To what extent did cities rely on specific tools and how did TELs influence cities’ fiscal choices? Using the results of a 2015 national survey of municipal governments in the United States with a population of 50,000 or more, this study shows that TELs have shaped the fiscal choices of cities in ways that can potentially redefine the relationships among city governments, their workforce, and citizens.
Cities are once again on the rise and have become the site of major public debates, from income inequality and immigration policy to where and how Americans should live. While municipal leaders are often eager to fill the void in political leadership left by Congress and state elected officials, they are often hamstrung by state home rule laws, which define the powers states grant to municipalities. These laws limit, among other things, municipal taxing authority. Recently, local government scholars have wrestled with whether and how to grant municipalities more fiscal authority, but such scholarship has not provided a unified theory of municipal taxing authority. This Article considers in detail whether and how to expand city taxing authority. It argues that state law should grant municipal governments "presumptive taxing authority." This presumptive taxing authority would parallel municipal regulatory authority and be similarly subject to state preemption law. Such reform would open the door to more municipal revenue innovation, while ensuring that the state can vindicate its weighty policy interests.
Managing the Fiscal Metropolis: The Financial Policies, Practices, and Health of Suburban Municipalities is an important book. This first comprehensive analysis of the financial condition, management, and policy making of local governments in a metropolitan region offers local governments currently dealing with the Great Recession a better understanding of what affects them financially and how to operate with less revenue. Hendrick's groundbreaking study covers 264 Chicago suburban municipalities from the late 1990s to the present. In it she identifies and describes the primary factors and events that affect municipal financial decisions and financial conditions, explores the strategies these governments use to manage financial conditions and solve financial problems, and looks at the impact of contextual factors and stresses on government financial decisions. Managing the Fiscal Metropolis offers new evidence about the role of contextual factors- including other local governments-in the financial condition of municipalities and how municipal financial decisions and practices alter these effects. The wide economic and social diversity of the municipalities studied make its findings relevant on a national scale.
Financial condition analysis is a critical task for public managers, but it is still unclear which indicators are the most salient measures of financial well-being. The financial health of Detroit, Michigan is unequivocally poor, providing an interesting case to evaluate the financial condition indicators that currently exist. We calculate the key financial indicators using data from Detroit over the last 11 years. We find the indicators fall into three groups: those that show no sign of impending financial crisis, those that show a steady worsening financial condition, and those that demonstrate a substantial change immediately prior to filing bankruptcy.
Understanding the financial condition of local governments is important for public managers and elected officials as they work to align revenues with p ublic demands for services, while maintaining financial solvency. This task becomes even more important when the economic and financial environment, over which local officials have little to no control, is collapsing around them. This article seeks to expand the literature of measuring financial condition of local governments by testing the validity and reliability of the Financial Condition Index (FCI). The FCI is a framework for evaluating financial condition that was initially developed by Groves, Godsey, and Shulman and later applied in US state-level studies by a number of scholars. The results from this article cast serious doubt on the applicability of using the FCI, and the four associated solvency dimensions, as an appropriate methodology for evaluating local government financial condition.
This article evaluates the effect of tax and expenditure limitations (TELs) on municipal general own-source revenue in the United States. Using an instrumental variable approach, this study addresses the endogeneity problem of TELs that has been largely overlooked in previous research. Data are collected on 724 US cities with populations of at least 25,000 from 1970 to 2006. Results indicate that when the endogeneity of TELs is taken into account, TELs lead to considerable reductions in property taxes but substantial increases in sales taxes, income taxes, and user charges per capita. The increases in the latter forms of revenue not only offset the loss in property taxes but also generate a supplemental revenue effect, resulting in a net gain of total municipal general own-source revenue per capita. The study provides important policy implications and suggests that TELs may have unintended consequences and lead to bigger government.
Now that state governments issue comprehensive annual financial reports in accordance with Statement No. 34 of the Governmental Accounting Standards Board, it is possible to generate a consistent and comprehensive set of government-wide financial information. We use the information to develop financial ratios to benchmark government financial performance from information beyond the traditional general fund, and test the hypothesis that such information is incorporated into the assessment of credit risk. We provide an empirical analysis of the incorporation of government-wide financial information into state government credit ratings, which provides a positive empirical test of the theory of certification and demonstrates how information from the government-wide financial statements is infused into financial markets.
Evaluations of public programs in many fields reveal that different types of programs—or different versions of the same program—vary in their effectiveness. Moreover, a program that is effective for one group of people might not be effective for other groups, and a program that is effective in one set of circumstances may not be effective in other circumstances. This paper presents a conceptual framework for research on such variation in program effects and the sources of this variation. The framework is intended to help researchers—both those who focus mainly on studying program implementation and those who focus mainly on estimating program effects—see how their respective pieces fit together in a way that helps to identify factors that explain variation in program effects, and thereby support more systematic data collection. The ultimate goal of the framework is to enable researchers to offer better guidance to policymakers and program operators on the conditions and practices that are associated with larger and more positive effects.
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.
This article examines the intergovernmental dimension of state fiscal stress. Using data from 1980-2005 and covering 47 U.S. states, the study answers two questions. First, does fiscal stress experienced at the state level reduce state governments’ expenditure responsibilities vis-à-vis the local public sector? Second, what functional responsibilities are implicitly devolved to local governments or centralized at the state level as a consequence of declining state fiscal condition? Three general frameworks are used to explain how the fiscal condition of states can affect state-local fiscal relations – fiscal federalism, the politics or interest group perspective, and the organizational model of fiscal slack.
While revenue sharing is not likely to eliminate state and local taxation since the tax effort factor subsidizes increased governmental growth, it does tend to eliminate what Madison saw as a distinctive feature of the U.S. form of government, a compound republic. This essay has discussed why local and state officials have conceded the principles of a compound republic to a monopoly form of government. Federal, state and local officials find it to their advantages to collude and operate in a monopoly environment rather than in a competitive environment.
We use a transparent statistical methodology for data-driven case studiesthe synthetic control methodto investigate the impact of economic liberalization on real GDP per capita in a worldwide sample of countries. Economic liberalization is measured by a widely used indicator that captures the scope of the market in the economy. The methodology compares the post-liberalization GDP trajectory of treated economies with the trajectory of a combination of similar but untreated economies. We find that liberalizing the economy had a positive effect in most regions, but more recent liberalizations, in the 1990s and mainly in Africa, had no significant impact.
The tax and expenditure limitation (TEL) "movement" of the 1970s and 1980s can be characterized in part as a struggle between local autonomy and state control. Undeniable shifts have occurred over the same period in state and local revenue systems and functional responsibilities. This article places these shifts within the context of this movement, using pooled, cross-sectional, time-series techniques for the period between 1970 and 1990, in an effort to assess its impacts. Findings suggest that TELs have resulted in increased centralization, lessened local responsiveness, increased use of local non-tax sources of revenue, and a sector less accommodating to the needs of dependent populations. TELs may have also had dubious effects on both the allocative efficiency and equity of the state and local public sector.
Can voters stop state governments from spending at high rates through the enactment of tax and expenditure limits (TELs), or do these laws become dead letters? We draw upon the principal-agent literature to theorize that TELs – one of the most frequent uses of the initiative process across the country – may be circumvented by the sorts of elected officials who would inspire their passage.
In order to investigate our claim, we conduct an event study. First, we test for the effectiveness of TELs across states using a differences-in-differences model. Second, we dissect our treatment variable using different legal provisions of the limits to test whether there is a uniform effect across different types of TELs. Finally, we compare state fiscal patterns before and after adoption on a state-by-state basis. Using this simple approach and other methods, we show that TELs are largely ineffective, and that state officials can circumvent them by raising money through fees or borrowing. Our finding is consistent with recent studies showing that policies passed through direct democracy can often be thwarted by the politicians charged with implementing them.
Cross-sectional time series data in a partial adjustment model are used to examine county government fiscal behavior under a “hard” tax and expenditure limitation policy, an aggregate property tax levy limit, versus a “soft” limit under Truth in Taxation in Kansas. Results indicate that under the aggregate levy limit, per capita property taxes, own-source revenues and own-source expenditures were significantly higher than under the Truth in Taxation policy where local officials face many fewer restrictions on their ability to raise the levy.
Following a wave of state-adopted tax and expenditure limitations (TELs), in 1992 the state of Colorado amended its constitution with the strictest TEL to date. Called the Taxpayer Bill of Rights and known as TABOR, the amendment has limited the size and scope of Colorado governments. Praised as a restraint on unbridled government growth in good economic times, TABOR reared its highly restrictive head as the state economy turned downward. The central issue explored is how binding tax and expenditure limitations affect the state’s ability to weather economic recessions and employ sound fiscal management practices. As in most institutional arrangements, the devil is in the details. The analysis presented here reveals that binding limitations create perverse incentives for budgetary actors to earmark, privatize, and shift responsibilities to other jurisdictions, which ultimately combine to reduce the state government’s ability to perform and to maintain sound fiscal management practices.
One of the thorniest issues of intergovernmental fiscal relations is state oversight of local fiscal affairs. States have oversight responsibility and must take action when local governments run afoul of responsible fiscal behavior. Less accepted is how states can detect local financial difficulties before they become emergencies that require state takeover. Research in the 1970s provided some assistance to states wishing to recognize local financial emergencies. But the time has come to look at this issue anew, particularly with an eye toward predicting local financial problems before they become serious. This article describes a 10-point scale that predicts these problems and tests the scale to predict local fiscal stress in a sample of Michigan local governments.
This paper examines the impact of a specific property tax limit, Proposition in Massachusetts, on the fiscal behavior of cities and towns in Massachusetts and the capitalization of that behavior into property values. Proposition places a cap on the effective property tax rate at 2.5% and limits nominal annual growth in property tax revenues to 2.5%, unless residents pass a referendum allowing a greater increase. The study analyzes the 1990–1994 period, a time when Massachusetts municipalities faced significant fiscal stress because of a 30% cut in real state aid and a demographically driven increase in school enrollments. The findings include the following: (1) Proposition significantly constrained local spending in some communities, with most of its impact on school spending; (2) constrained communities realized gains in property values to the degree that they were able to increase school spending despite the limitation; and (3) changes in non-school spending had little impact on property values.
The design of budget rules and institutions, long a neglected area in public finance and macroeconomics, has recently been thrust to center stage by the debate over a balanced budget amendment and other deficit-reduction measures in the United States. This paper describes the existing evidence on how budget rules affect fiscal policy outcomes. It contrasts the `institutional irrelevance view,' which holds that budget rules can be circumvented by modifying accounting practices and changing the nominal timing or other classification of taxes and expenditures, with the `public choice view' in which fiscal institutions represent important constraints on the behavior of political actors. Several distinct strands of empirical evidence, from the U.S. federal experience with anti-deficit rules, from U.S. state experience with balanced budget rules, and from international comparisons of budget outcomes in nations with different fiscal institutions, suggest that fiscal institutions do matter. These results reject the institutional irrelevance view. The existing evidence is not refined enough, however, to provide detailed advice on how narrowly-defined changes in budget rules might affect policy outcomes.
Despite the fact that the tax structure is a product of the political process, rarely does an economic analysis of tax policy take account of the political environment within which the tax structure is designed. The analysis that follows begins with the recognition that the political system uses resources to desing tax systems, and these costs should be taken into account along with other welfare costs of the tax system. While public choice theory might offer much to help advance the theory of taxation, the main focus of this essay will be policy-oriented, and will begin by explicitly recognizing the political costs that are created when people try to influence tax law for their benefit.
In this paper we analyze large sample properties of matching estimators, which have found wide applicability in evaluation research despite that fact that their large sample properties have not been established in many cases. We show that standard matching estimators have biases in large samples that do not vanish in the standard asymptotic distribution if the dimension of the covariates is at least four, and in fact dominate the variance if the dimension of the covariates is at least five. In addition, we show that standard matching estimators do not reach the semiparametric efficiency bound, although the efficiency loss is typically small. We then propose a bias-corrected matching estimator that has no asymptotic bias. In simulations the bias-corrected matching estimator performs well compared to simple matching estimators and to regression estimators in terms of bias and root-mean-squared- error.
The 10-Point Test of Financial Condition: Toward an Easy-to-use Assessment Tool For Smaller Cities
- Ken W Brown
Brown, Ken W. 1993. "The 10-Point Test of Financial Condition: Toward an Easy-to-use Assessment Tool For Smaller
Cities." Government Finance Review 9: 21.