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This study examines the fiscal impact of tax and expenditure limitations (TELs) on state spending by expanding the popular, narrow view of examining TELs and taking into account the scope, purpose, and restrictiveness of individual state TELs. Using an efficient estimator, called fixed effect vector decomposition I employ a set of panel data from all fifty states for the period 1997 - 2006. While a number of studies have been inconclusive about the impact of state TELs on spending, this study finds that having a TEL is not what matters. Rather, the impact of TELs depends on the actual features of the individual TEL. Further, TELs impact different categories of spending in different ways and, under the right conditions, TELs can have the desired impact and effectively reduce state spending.

The local property tax is the oldest tax in the United States, as well as being the only substantial tax on landed wealth, a major part of the housing expense of most American families, and the most important revenue source for local governments. It is also increasingly limited by state law. This chapter presents a synthetic review of the literature on property tax limitation laws. Property taxation is a crucial resource for local governments because it is primarily a tax on real estate, and land is the least mobile tax base. A tax on the market value of real estate may have the effect of transmitting real estate price shocks to individual land users. Property tax limitation laws provide some homeowners with social protection from such market-induced economic shocks, but they do so at the price of a substantial reduction in state capacity. A meta-regression analysis of published studies finds that property tax levy limitations, on average, reduce local government budgets by as much as 5%. The potential implications for provision of other public goods, including social protection for other groups, are discussed.

This paper investigates the impact of state governments’ “Tax and Expenditure Limits” (TELs) on their tax progressivity and redistributive spending. A two stage least squares (2SLS) regression model of data covering 1985-2007, was employed to allow for simultaneity in the relationships between intergovernmental transfer, tax progressivity, expenditure progressivity, and labor mobility. This model tested whether high- or low income residents had paid for and benefited from these fiscal institutions. As a result we find that TELs significantly decrease tax progressivity and increase poverty rate. These two policy effects should be explicitly accounted for in the design or revision of TELs.

This paper examines how voters' initiatives used in 24 states affect state budget balance. The author first uses a qualitative approach to investigate the extent to which ballot initiatives are used and identifies the initiatives that have had significant impacts on state revenues and expenditures. The review shows that the impact of initiatives differs from a state to state. The heavy initiative user states have experienced substantial impact on their budgets. Second, as their impact on state budget is particularly significant during economic downturn, a linear regression analysis is performed to examine the relationship between the use of initiatives and state budget balance measured in terms of the state budget gap as percentage of FY 2010 general fund. The regression analysis shows that the number of expenditure-induced initiatives have a statistically significant effect on state budget gap, while revenue-restrained measures (e.g. number of tax-limiting measures and the use of super majority or popular vote to approve tax increase) only marginally affect the FY 2010 budget gap.

Unanticipated economic fluctuations exert pressure on state governments to conduct discretionary tax adjustments to balance the budget. Even though states adjust fiscal policy as the economy fluctuates, the typical cyclical economic factors are not the sole determinant of such adjustments. State government budgeting systems in the United States operate under a variety of fiscal constraints. The tax and expenditure limit (TEL) is a prominent fiscal constraint in state governments. Using a panel dataset covering 47 continental state governments from FY 1988 to FY 2006, this paper examines the impact of TELs on state discretionary tax adjustments. Results from this analysis shows that states with stringent TELs tend to conduct fewer tax cuts when facing potential deficits.

Since the 1978 adoption of Proposition 13 California’s fiscal conditions have steadily deteriorated. This article questions whether this fiscal deterioration is due to a lack of budget affordability or of institutional ineffectiveness. In examining the institutional ineffectiveness of California’s budget system the article focuses on: (1) general revenue mobilization, (2) expenditure mandates in education, and (3) legislative party divisions in face of supermajority requirements. To this end, the article develops a pre-post regression model that analyzes the factors that influenced the state budget balances. The article finds that California’s deteriorating fiscal conditions are strongly influenced by the declining effective tax rate. The study also finds that increases in education spending are a statistically significant factor, but finds mixed support for the argument that political divisions drive California’s budget deficits.

Although municipal enterprise funds provide several advantages to cities in the provision of goods and services, little is known about how these municipally operated businesses affect other aspects of the fiscal management practices of the cities which use them. This is particularly true of non-utility enterprises. This study uses the concept of net revenue transfers to examine how five commonly used non-utility enterprises impact the tax, expenditure, and revenue generation practices of cities. The results provide a new perspective and counter some commonly held views about non-utility enterprises.

During the 1990s many states used budget surpluses to refinance public education and provide property tax relief. This paper uses a case study of Kansas to assess the sustainability of state-initiated property tax cuts. It finds that the cuts are not fully sustainable over time because of court and federal mandates that require additional spending on education, economic fluctuations that reduce the ability of state budgets to maintain a given share of education spending, and demands for local control to allow school districts to spend more or less than state-mandated levels. The paper also argues that the property tax is essential to economic efficiency and local control.

This paper examines the role of state-imposed fund balance limitation on school district budgetary behavior in New York State between 1997 and 2004. The findings suggest that imperfect state limitations may lead to imperfect results. Compliance among New York state school districts with the two percent limit in the examined period is low. While the constraint does not limit unreserved unappropriated fund balances to two percent, it does influence the way districts form estimates of revenues and expenditures. Recent changes in the limitation (to four percent) do not fully address the flaws of the original rule (lax enforcement, applied on the budgeted level, and generous rules on reserves), thus no significant change in budget behavior is expected.

Cities’ reliance on property taxes has declined since the 1970s. This shift has been attributed to state rules enacted in the wake of the tax revolt and intended to curb property taxes. The extent to which state limits on property taxes have affected their cities’ revenues is unclear. This study examines competing explanations for the change in city property tax reliance among states. Pooled cross-sectional time series analysis is used to assess how much state limits or other factors account for changes in property tax reliance over time. The results of this analysis challenge state limitations’ long-term effects.