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.     

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.     

Measuring the Impact of Lotteries on State per Pupil Expenditures for Education: Assessing the National Evidence

State‐operated lotteries have recently been asserted by public administrators and academicians as panaceas for eradicating revenue disparities existing across public school districts in the American states. The purpose of this research project is to empirically test the hypothesis that lottery revenues raise the state expenditures for public education. A state‐level national dataset, which includes fifty American states over the period 1977–1997, was used for the analysis. Pooled time‐series cross‐sectional and ARIMA modeling was employed to test the hypothesis. This study finds that lottery revenues had a positive influence on state per pupil expenditures for education. The evidence for the impact of lotteries on state per pupil expenditures for education was robust and statistically significant.     

The Distributional Politics of Fiscal Adjustment: A Case Study of Four Northeastern States

The federal Tax Reform Act of 1986 and an unexpected economic downturn soon thereafter resulted in a divergence between actual and anticipated revenues at the state level. To cope with the resulting budget deficits, states increased taxes, decreased expenditures, or both. This paper looks at the decisions made in four Northeastern States-New York, Connecticut, New Jersey, and Massachusetts.     

The Impact of Tax Revenue from Capital Gains Realizations on State Income Tax Revenue and Budget Conditions

We explore the effect of the rapid increase in capital gains realizations on state income tax revenue during the 1990s and 2000s, and the effect that this had on state fiscal decisions regarding the use of these revenue. We find wide variation in the growth of capital gains realizations across states and that the growth in capital gains had a significant effect on state income tax revenue for many states. We find that states used a sizable portion of the additional revenue from capital gains to fund reserves in the year the revenue was generated, and that capital gains revenue lead to some reductions in taxes but not to increases in expenditures. The evidence suggests that states were conservative in their use of capital gains related revenues.     

Contribution limits and the effectiveness of campaign spending

Much work on the apparent ineffectiveness on incumbent spending in congressional elections has hypothesized that the productivity of incumbent spending is low because incumbents operate on the “flat part” of their election returns function. Differences in campaign spending associated with state campaign finance laws allows for a test of this hypothesis because restrictions on campaign contributions tend to reduce campaign spending. Exploiting cross-state variation in campaign finance laws, this study tests whether campaign expenditures by state House candidates are more productive when candidates are subject to contribution limits. The results show that campaign expenditures by incumbents and challengers are more productive when candidates run in states with campaign contribution limits, as opposed to in states without limits. In states with contribution limits, incumbent spending and challenger spending are equally productive, and spending by both candidates is quantitatively important in increasing their vote shares.     

Setting limits through global budgeting: hospital cost containment in Rhode Island

In 1974, hospitals in Rhode Island have participated in annual negotiations with state officials and representatives from Blue Cross to determine the allowed increase in statewide hospital costs (the "Maxicap") for the next fiscal year, based on projected increases in hospitals' revenues, changes in patient volume and operating expenses. Individual hospital budgets may be above or below the Maxicap as long as the total increase in hospital costs for all hospitals in the state does not exceed the negotiated amount. At a time when regulatory solutions are increasingly under fire, continued support for Rhode Island's approach to hospital cost containment from third party payers, providers and public officials stands in stark contrast to other states where rate setting was either dismantled or discredited as a cost control strategy. A negotiated global cap on hospital expenditures offers an alternative to formula-based state rate-setting methodologies which could be incorporated as part of an all-payer reimbursement methodology or as an incremental step towards more comprehensive reform.     

Equity and Accountability: The Impact of State Accountability Systems on School Finance

Using an 11‐year panel data set containing information on revenues, expenditures, and demographics for every school district in the United States, we examine the effects of state‐adopted school accountability systems on the adequacy and equity of school resources. We find little relationship between state implementation of accountability systems and changes in school finance equity, though we do find evidence that states in which courts overturned the school finance system during the decade exhibited significant equity improvements. Additionally, while implementation of accountability per se does not appear linked to changes in resource adequacy, states that implemented strong accountability systems did experience improvements.     

Revisiting the Income Tax Effects of Legalizing Same‐Sex Marriages

In this paper we estimate the impacts on income tax collections of legalizing same‐sex marriage. We utilize new individual‐level data sources to estimate the federal income tax consequences of legalizing same‐sex marriages. These data sources also allow us to estimate the impact of legalization on state income tax collections. We find that 23 states would realize a net fiscal benefit from legalization, while 21 states would experience a decline in revenue. The potential (annual) changes in state tax revenue range from negative $29 million in California to positive $16 million in New York. At the federal level, our estimates suggest an overall reduction in revenues, ranging from a potential loss of $187 million to $580 million. Overall, we find that the federal and state impacts are quite modest. We also find that our estimates are only marginally affected by alternative assumptions about how many same‐sex couples will choose to marry and which partner will claim any children for tax deduction purposes.     

How Cities in California Have Responded to Fiscal Pressures Since Proposition 13

Fiscal pressures on California cities have been severe since the passage of Proposition 13. Federal and state aid policies have, in fact, exacerbated an already wrenching pattern of revenue losses since FY 77-78. State aid, in particular, has perversely dropped the most for those cities hit hardest by reductions in other revenues outside their direct control. Despite this, California cities have kept total real per capita revenues and expenditures constant over this period by increasing revenues from a variety of local sources—and especially from current service charges for enterprise activities. Furthermore, cities hit hardest by exogenous revenue losses have increased locally raised revenues the most. In short, cities in California have responded to reductions in revenues outside their direct control by increasing revenues from sources within their direct control, rather than by reducing expenditures and their revenue-increasing responses have tended to be in proportion to the losses they have faced in exogenous revenues.     

State support under the new federalism

The new federalism will reduce total intergovernmental revenues to local governments. The reduction will be due to both the transfer to the states of much of the federal aid which previously flowed directly to local governments and reductions in total federal aid levels. Pass-through requirements on the shifted aid will not affect this general result but may soften the impact in many states. Because of differences in the extent to which state governments substitute federal pass-through aid for state aid from own-source revenues and in the degree to which different sources of revenues are treated differently by the states, local revenue reductions will vary greatly from state to state. The losses for local governments will range from 100% of the shifted aid in some states to as little as 15–20% in others.     

An Evaluation of Alternative Tax and Expenditure Limitation Policies on Kansas Local Governments

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.     

Deciding to Provide: Local Decisions on Providing Social Welfare

Fiscal federalism predicts local governments will avoid social welfare expenditures, owing to capital mobility across local jurisdictions. Yet Census of Governments data consistently show that many local governments provide one or more social welfare functions, and moreover many jurisdictions provide these functions without federal or state intergovernmental support. This article finds evidence that, while local expenditures are largely driven by fiscal capacity and federal and state assistance, local decisions on providing social welfare functions and participating in intergovernmental revenues are primarily affected by degree of capital mobility and by local political factors. Consequently, local governments exercise much greater autonomy over social welfare policymaking than fiscal federalism suggests.     

The Democratic Deficit in the States

We study how well states translate public opinion into policy. Using national surveys and advances in subnational opinion estimation, we estimate state‐level support for 39 policies across eight issue areas, including abortion, law enforcement, health care, and education. We show that policy is highly responsive to policy‐specific opinion, even controlling for other influences. But we also uncover a striking “democratic deficit”: policy is congruent with majority will only half the time. The analysis considers the influence of institutions, salience, partisan control of government, and interest groups on the magnitude and ideological direction of this democratic deficit. We find the largest influences to be legislative professionalization, term limits, and issue salience. Partisanship and interest groups affect the ideological balance of incongruence more than the aggregate degree thereof. Finally, policy is overresponsive to ideology and party—leading policy to be polarized relative to state electorates.     

Budget Balancing in Difficult Times: The Case of the Two New Yorks

The objective of governments is to efficiently provide essential services and infrastructure to their jurisdictions at a competitive tax rate within the constraint of a balanced budget. In recent years, several states have found it difficult to maintain this standard. This article examines the nature of the problem in the overlapping jurisdictions of New York City and New York State. Specifically, it explains the nature of projected budget gaps that have emerged in New York, and describes how the two New Yorks' political leaders have managed their budgets in recent years. Furthermore, this article demonstrates that expenditures significantly exceed revenues, thus leading to inevitable budget gaps, and that policies designed to close the gap have harmful consequences.     

Surplus Expenditures: A Case Study of Colorado

In this study the concept of surplus expenditures is introduced, and a theory of surplus expenditures is explored. The study examines the disposition of surplus revenues that emerged from the imposition of a binding tax and spending limit in Colorado. The study concludes that the accumulation of surplus revenue requires a major overhaul of budgetary reporting and decision making to reflect the impact of binding tax and spending limits on the budgetary process. The reporting recommendations are designed to make the budget more transparent and provide both taxpayers and legislators the information they need to make more rational decisions. The policy recommendations explore options for a more efficient and equitable disposition of surplus revenue.     

The states' scramble for federal funds: Who wins,who loses?

Interstate differences between federal expenditures and receipts are very large, generally favoring the southern and western states. The more slowly growing states of the northeast and midwest point to these imbalances as one source of their economic difficulties. The major source of disparity lies in revenue patterns, not in expenditure allocations. Reallocating federal expenditures on an equal per capita basis would reduce regional disparities in flows of federal funds by only about 25 percent. The principal regional beneficiary of equalized expenditures would be the midwest states of the Great Lakes region. However, contrary to the expectations of proponents of such redistribution, the southeastern states would also be major beneficiaries while the larger states of the mideast and New England would be hurt. Selective expenditure changes might be targeted more effectively to individual regions or states; but finding consistent, generally acceptable principles upon which to base such changes is a formidable problem.     

The fiscal effects of statehood: New Mexico and Arizona, 1903–1919

The residents of US territories often vote against statehood for fear government will use its greater sovereignty to impose a heavier tax burden. On the other hand, public choice theory predicts that fiscal decentralization limits government’s size. The financial reports of New Mexico and Arizona were examined before and after statehood in 1912. Graphical and regression analyses of the ratios of receipts and expenditures to property values and US GNP suggest that the relative price of government rose far more in the two new states than in a control state, Nevada, thus supporting the claims of statehood’s opponents.     

Turning Up the Heat: The Impact of Electric Utility Competition on K–12 Education Funding in Ohio

Ohio, like many states, is currently-considering deregulation of the retail electric power industry. This issue is made more complex in Ohio because structural change in the delivery of electric power is also likely to have a negative effect on state and local government revenues. This effect occurs because of three main forces: the elimination of differential property tax treatment of utilities relative to general businesses, the likely decrease in state electricity excise tax revenues as a result of falling power prices and administrative difficulty in taxing out of state providers, and the potential for stranded costs to diminish the taxable value of electric generating equipment. This article provides an overview of these issues and a brief analysis of the extent to which these problems will be shared by other states. The article then demonstrates the impact of deregulation-induced tax changes on both state and local school district revenues in Ohio and concludes with a discussion of how the state's ability to insulate local governments from these adverse fiscal effects is made both more imperative and more difficult by a recent Supreme Court Ruling on school funding Finally, the issues discussed in the article are placed in a more general context of the challenges of adjusting tax policy to changing circumstances     

The Great Entitlement Raid

To bail out the banks, and more generally Wall Street, and as a result of their profiteering, the nation faces a great deficit. It is premature to deal with it, but when the time comes, it should not be closed by scaling back social programs and entitlements. Such a way to deal with the deficit would in effect amount to a two-step major wealth transfer from the most vulnerable Americans to the most endowed. (First the funds were given to Wall Street; next they will be taken from the poor and working-class Americans, to cover the shortfalls). There are other sources for reducing government expenditures and for new revenues.