Tax Expenditure Reporting: The Utilization of an Innovation

Central to this article is the question, “Are tax expenditure reports used?” State legislators serving on tax committees in ten states were surveyed regarding their use and their perceptions of others' use of tax expenditure report information. Responses indicate (1) strong acceptance and broad use of report information; (2) purposes and policy stages of use characteristic of technical information use; and (3) use focused predominantly on resource acquisition (revenue) policy rather than resource allocation (budget) policy. Thus it appears that tax expenditure reporting does not operate to secure budgetary control over tax expenditures, and consequently tax expenditures continue largely to escape budget scrutiny.     

State and local tax reform for the 1990s: Implications from Arizona

The state of Arizona recently established a temporary, blue-ribbon committee to evaluate the state's fiscal system and to recommend changes that would improve the system. The impetus for the committee was a series of budgetary difficulties in the 1980s that lawmakers hoped might be avoided in the future by implementing major structural changes suggested by a long-run analysis of the state's economy and taxes and expenditures. The findings and recommendations of the committee are relevant for states across the country. It is likely that many states will be faced with tough budgetary challenges in the decade of the 1990s because the states' revenue systems have not adapted to the changes in the level and nature of state spending responsibilities.     

Public Attitudes Toward Social Spending in the United States: The Differences Between Direct Spending and Tax Expenditures

This paper uses a survey experiment to examine differences in public attitudes toward ‘direct’ and ‘indirect’ government spending. Federal social welfare spending in the USA has two components: the federal government spends money to directly provide social benefits to citizens, and also indirectly subsidizes the private provision of social benefits through tax expenditures. Though benefits provided through tax expenditures are considered spending for budgetary purposes, they differ from direct spending in several ways: in the mechanisms through which benefits are delivered to citizens, in how they distribute wealth across the income spectrum, and in the visibility of their policy consequences to the mass public. We develop and test a model explaining how these differences will affect public attitudes toward spending conducted through direct and indirect means. We find that support for otherwise identical social programs is generally higher when such programs are portrayed as being delivered through tax expenditures than when they are portrayed as being delivered by direct spending. In addition, support for tax expenditure programs which redistribute wealth upward drops when citizens are provided information about the redistributive effects. Both of these results are conditioned by partisanship, with the opinions of Republicans more sensitive to the mechanism through which benefits are delivered, and the opinions of Democrats more sensitive to information about their redistributive effects.     

Budget institutions and taxation

While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.     

Effects of the Form of Government and Property Tax Limits on Local Finance in the Context of Revenue and Expenditure Simultaneity

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.     

Budgeting Rules and Program Outcomes

It is not efficient for a budget system either to enable excessively frequent changes in programs and tax policies or to be rigid and unresponsive. Program durability is one measure of how a budget system weighs the competing goals of resoluteness and responsiveness. The federal budget has different processes—mandatory and discretionary spending and tax expenditures—each based in separate congressional committees and relying on separate procedures. This article examines the budget systems' durability. One finding is that mandatory spending programs and tax expenditures are more durable than programs backed by discretionary spending. However, while programs targeted to vulnerable populations and supporting long‐term planning, such as in income support and health, might benefit from durability, these programs display shorter durability, not longer. While displaying greater durability, tax expenditures do respond to changes in different economic sectors, based on the changes in spending of other budget systems.     

School Finance Reform's Impact on New Jersey's State Spending Priorities

The combination of school finance reform, voter opposition to higher taxes, and rising costs forced the state of New Jersey to reorient its spending priorities. This article presents an analysis of budgetary data for the period FY 1990 to FY 1996, which clearly indicates that: 1) state resources were shifted from direct state services to state aid; 2) even though the 1991 sales and income tax hikes were revoked, the state's tax structure was more progressive in 1996 than in 1990; 3) Governor Florio's attempts to level down per pupil expenditures by reducing payments to wealthy school districts were largely stymied; 4) the proportion of state resources allocated to public education was lower in FY 1996 than the year preceding school finance reform; 5) because of education's reduced budget share, efforts to level up per pupil expenditures were severely circumscribed; and 6) state aid was diverted from homestead rebates to municipal aid.     

Fiscal consolidation and economic growth in India: Do policymakers need to shift focus from quantity to quality of fiscal adjustments?

This paper evaluates the impacts of fiscal consolidation programmes and their composition on the growth rate of national income for Indian economy. More specifically the study tries to address two questions that is, composition of consolidation and its resultant impact on growth rate of income and the relative desirability of alternative sources of deficit financing that is, internal versus external borrowing. The study employed time series data from 1990–1991 to 2017–2018 and used the technique of ordinary least square and generalized method of moments. The study finds that, in long run, fiscal consolidation need not be necessarily recessionary in nature. Moreover, the composition of consolidation was found to have a significant impact. The study could not extend empirical support in favour of back‐loaded (spending financed) consolidation design as has been established for advanced economies. Moreover the study could not establish the negative impacts of revenue funded (both tax and non‐tax) fiscal consolidation on the growth rate of economy. The study documented that it is desirable to target expenditures such as subsidies, transfers and interest payments to infuse more discipline. A judicious mixture of both spending cuts and revenue increase may be a better strategy to consolidate in order to have better returns. The study highlighted that the external source of deficit financing is always costlier against the internal borrowings. The study noted that it is imperative on part of policymakers to shift their focus from quantity to the quality of deficits and the resultant consolidation programmes.     

Government growth and private contributions to charity

We exploit the time-series properties of charitable giving to provide additional insights into the relationship between charitable contributions and government spending. Cointegration tests reveal a significant long-run relationship between several categories of charitable giving and government spending. Granger causality tests provide evidence on the short-run giving and spending relationship. Evidence suggests that charitable contributions to education respond quite differently to state and local government education expenditures versus federal government expenditures. We argue that the government spending and charitable giving relationship depends on the source of government revenue, how this revenue is used, and the rational ignorance of private donors.     

Tax and expenditure limitations and the fiscal relationships between state and local governments

This paper uses comprehensive data on state and local tax and spending limitations for forty-nine states between 1976 and 1990 to estimate the effects of these limits on the fiscal relationships between state and local government. Results indicate that tax and spending limits on local governments are only partially effective in reducing revenues because political agents bypass limitations by transferring revenue reliance to unconstrained revenue sources, or because unconstrained levels of government take on additional revenue responsibilities. In particular, the empirical analysis demonstrates that binding local government fiscal constraints are associated with reductions in local revenues and increases in state aid to local governments. In contrast, state government limitations are related to reductions in both state and local own source revenues.     

Guns vs. Taxes? A Look at How Defense Spending Affects U.S. Federal Tax Policy

Although studies have shown a theoretical and empirical link between defense spending and economic growth and between economic growth and tax policy, the impact of defense spending on federal tax policy remains largely unexplored. This paper proposes a theoretical model and empirical test to explore the direct and indirect effects of defense spending on federal tax policy. The findings suggest that consumption expenditures for national defense directly influence the federal corporate income tax rate. However, the analysis finds no indirect relationship between defense spending and federal tax policy mediated through economic growth.     

Does the Local‐Option Sales Tax Provide Property Tax Relief? The Georgia Case

This study examines the effect of a one percent local-option sales tax (LOST) on property tax level, millage rate, and total spending level in Georgia counties. The study covers a 13-year period for 136 Georgia counties. The findings suggest that the law, which requires rollback of property taxes when the LOST is used, led to actual property tax relief as well as millage rate reduction. Regression results show that counties collecting the LOST tend to have per capita property taxes that are an average of $12 or 1.8 mills lower than counties that do not collect the tax. Whereas an extra dollar of LOST revenue provides about 28 cents in property tax relief, it leads to an increase in total spending of about 48 cents. In sum, the LOST has achieved the objectives of property tax relief, but on balance it is more an augmentation of than an effective substitute for property taxes in Georgia counties.     

The Flypaper Effect: Evidence from India

The flypaper effect refers to the phenomenon whereby expenditure stimulus from unconditional grants exceeds that from an equivalent increase in income. The flypaper effect has been described as "money sticks where it hits." The present study empirically tests the flypaper effect for the Indian economy. The study also tests the asymmetry hypothesis that looks at the impact of retrenchment in grants. Results obtained in the present study show the flypaper effect to be vindicated. We find that both capital and revenue expenditures receive a greater stimulus from grants than would an increase in income. Results show that in the prereform period both revenue and capital expenditures are maintained during periods of grant cuts. However, in the postreform period it is only expenditures on revenue accounts that are maintained in periods of grant reduction. We also find that during periods of grant reduction, state governments maintain their expenditure programs by raising their own tax revenue. This suggests that grants from the center have had a disincentive effect and could be a reason that state governments have not exploited their tax potential to the fullest. By bringing to the fore the disincentive effect of grants we wish to emphasize the urgency of taking a closer look at restructuring and redesigning our system of intergovernmental transfers.     

A User's Guide to State Revenue Forecasting

One of the most difficult tasks in preparing a state budget is forecasting available revenues. An overly optimistic forecast may subsequently require unpopular budget cuts, tax increases, or both. A pessimistic forecast may trigger a political controversy over the size of the budget surplus, or may encourage additional spending that cannot be sustained in the future. Forecasters have always informally shared their experience with each other. Only in recent years, however have scholars begun to document those experiences.
A forecast user is an elected official, program manager, reporter or private citizen involved in the budget process who uses a forecast prepared by someone else as a basis for making or influencing policy decisions about state taxes and spending levels. __ While the objectives of these forecast users may vary depending on their role in the budget process, they all share one need in common: a sound forecast which provides them with the information they need to participate in the budget process. The first part of this article briefly reviews the status of revenue forecasting in the states. The second part reviews five specific forecasting issues. The third section, discusses limits of revenue forecasting. The concluding section is a summary and checklist of good revenue forecasting practices.     

Expenditure effects of metropolitan tax base sharing: A public choice analysis

This research explores probable budgetary consequences from the introduction of an institutional change which requires communities in metropolitan areas to pool any growth in the commercial-industrial tax base so that all cities benefit from new development irrespective of where the development occurs. Sharing of the tax base has been suggested as a means to overcome fiscal disparities among local governments in metropolitan areas and to reduce competition for new industrial development, thus, promoting ‘orderly development’ of the urban area. An alternative view of the institutional change focuses on the consequences of removing the tax base from the control of the local unit of government and suggests that based upon existing studies of government size and the cost of public services, government managers will be less responsive to the wishes of the citizen/taxpayer after the introduction of tax base sharing. The efficiency aspects of local government finance are examined and based upon data for the Minneapolis-St. Paul metropolitan area, the expenditure effects are estimated. The empirical evidence suggests that while revenue flows are altered in the metropolitan areas, the primary impact of tax base sharing has been to expand the level of government expenditures, not equalize interjurisdictional tax rates.     

Betting on the Future with a Cloudy Crystal Ball? How Financial Theory Can Improve Revenue Forecasting and Budgets in the States

Accurately predicting revenue growth is nearly impossible. Predicting the peaks and valleys of the business cycle is even more hopeless. This matters because tax revenues are largely driven by economic growth. Volatile, unpredictable revenue growth causes all sorts of unpleasant responses on the part of governments, most commonly manic-depressive patterns of spending and taxing. Fortunately, modern financial economics gives us a set of tools that can be used to manage volatility. This article shows how such tools can be used to inform fiscal decision making. The focus here is state governments, but the analysis applies to all jurisdictions that face hard budget constraints and therefore must balance spending increases against revenue growth.     

Interlocal Collaboration and Local Fiscal Structure: Do State Incentives Matter?

Interlocal collaboration is considered an important tool for cost-saving. States, therefore, have incentivized interlocal collaboration in different ways. To understand the budgetary consequences of interlocal collaboration and state incentives, we examine counties in Nebraska where the State uses two incentive mechanisms—resource restrictions and additional access to restricted revenues granted to counties with collaboration. This study finds that county expenditures are lower when they spend more through collaboration. While this lower spending is related to lower revenues in counties less constrained by state restrictions, the results for counties more constrained are unclear. State incentive structures may matter for such variations.     

An analysis of asymmetric effect of federal transfers across Indian states

This study empirically examines the asymmetric effect of federal transfers in India using a panel dataset of 18 states from 2000–2001 to 2019–2020. In mapping the asymmetric effect of federal transfers on subnational spending across the Indian states, we test it in the extended ‘flypaper effect’ framework, examining whether subnational expenditures respond in the same way to changes in federal transfers. To quantify the extent of the asymmetric effect on the subnational expenditure, we employed the panel non-linear ARDL model. The results suggest that subnational spending has a greater asymmetric response to the increase in federal transfers than to a decrease. At the disaggregate level, ten out of 18 states have a fiscal replacement kind of asymmetric effect in any spending specifications. But only three validate it in the capital and development spending, and seven states validating in the non-development expenditure on the revenue accounts. Replacing the cut in federal transfers with other revenue sources that prioritise non-development spending over development spending is problematic.     

A critique on the effectiveness of tax-expenditure limitations

The principal purpose of this study is to investigate the probable impact of tax and spending limitations on tax burdens and state expenditures. This is accomplished via a systematic evaluation of the alternative proposals associated with tax limitation legislation. In particular, this paper analyzes the linking of state public sector growth to inflation, limiting tax burdens to a percent of personal income, the inclusion of escape clauses in the enabling legislation and the evolution of these tax limitations into legalized minimums.     

Revenue Diversification in Arkansas Cities: The Budgetary and Tax Effort Impacts

The consequences of revenue shortfalls for cities are particularly dramatic due to the balanced‐budget requirement. Revenue diversification is one method of stabilizing revenue streams because diversified revenue structures can mitigate the revenue fluctuations often associated with single source revenue. Using audited financial reports, this study examines the impact of revenue diversification in Arkansas cities over 10 years. To address the issue of revenue adequacy, this study examines diversification's impact on current year budget changes in revenue and expenditures as well as its impact on tax effort.