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

Much of the research on tax and expenditure limitations (TELs) focuses on the impact that limits have on the size of the public sector or the distribution of expenditures at the state and local levels. While these results shed light on the extent to which TELs succeed in reducing government spending, they do not have much to say about the impact of TELs on government budgeting or financial planning, despite the fact that voters support TELs in the hope of reducing government inefficiency (Courant, Gramlich, and Rubinfeld 1980; Ladd and Wilson 1982). This paper examines the effect of TELs on the stability of government revenues; sound tax policy entails controlling the volatility of revenues in order to plan more effectively for the future. Using panel data from Colorado's Division of Local Government as well as the Census Bureau's Annual Survey of State and Local Government Finances, this paper examines the impact of Colorado's 1992 Taxpayer's Bill of Rights (TABOR) on local government finances. Results from difference‐in‐difference estimation suggest that TELs increase revenue and expenditure volatility.     

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.     

How Municipal Property Tax Responded to State Aid Cuts: The Case of Massachusetts Municipalities in the Post‐2001 Fiscal Crisis

This empirical study examines municipal property tax responses to state aid cuts during the post‐2001 fiscal crisis. Using panel econometric techniques on annual changes in property tax levy by 351 incorporated Massachusetts municipalities in the period of 2002–2006, the results suggest that municipal governments offset about 9 cents of each dollar of net state aid cut through the increase of their property tax rates. It contributes to public finance literature on the extent to which local property tax can be used to stabilize municipal revenues when the intergovernmental revenue shrinks.     

Simulating Massachusetts Municipalities' Recession Readiness: Early Warning of a Perfect Storm?

We simulate effects of two recessions on Massachusetts municipalities in light of their relative dependence on state aid, capacity to increase property taxes under Proposition 2½ constraints, growth, and nondiscretionary costs. We also explore the efficacy of local government stabilization funds in light of current literature on stabilization funds, slack resources in general, and the state–local fiscal relationship. We found substantial variance in Massachusetts municipalities' recession readiness. Fifty‐five (16 percent) municipalities have insufficient resources to weather a severe recession scenario without significant sacrifice due to reliance on state grants‐in‐aid, low property tax revenue growth, erosion of property tax revenue increments by increases in nondiscretionary expenditures, and inadequate stabilization funds.     

Tax and Expenditure Limitations and the Fiscal Response of Local Government: Asymmetric Intra-Local Fiscal Effects

This article empirically investigates the effects of introducing statewide measures to limit the ability of local jurisdictions to raise revenue or make expenditures. It does so in intervals of five years over a 25-year period, using fiscal observations for 31,804 units of local government in 787 metropolitan counties across the contiguous United States. Specifically explored is the effect of tax and expenditure limitations on the variation in revenues and expenditures between general purpose governments and school districts within county areas. Rather than imposing a uniform constraint across jurisdictions, tax and expenditure limitations (TELs) are associated with increased variation across both general purpose and school district revenues and expenditures and, by implication, increased service differentials. Effects are found to be asymmetric, with increased variation greatest within counties comprising the urban core and those with relatively more disadvantaged populations. The implications are that TELs are most constraining on the ability of governments serving economically less prosperous and at risk populations to meet public service needs. Such differential effects are of more than questionable merit and are the result of the application of blunt instruments to what is often an undemonstrated need. The outcome impairs both the efficiency and responsiveness of the local public sector.     

Constitutional Tax and Expenditure Limitation in Colorado: The Impact on Municipal Governments

Tax and expenditure limitations (TELs) have become a pervasive influence on local government fiscal affairs. Explanations for the spread of TELs suggest that voters thought local government was growing more than needed. Thus, TELs were intended to constrain growth and reduce the size of local governments. This article's purpose was to determine the impact of two separate kinds of TELs, one a property tax measure, and the other a comprehensive revenue and expenditure limit, upon the growth of municipal governments in Colorado. Using a panel data set on municipal budgets (1975–1996), the article demonstrates three major points: 1) the effectiveness of a TEL in achieving reductions in local government revenue and spending growth depends upon the nature of the TEL; 2) the comprehensive TEL did effectively constrain growth and reduce local government reliance on the property tax, despite the local options for exemption; and 3) TELs do not have uniform impacts among governments of different population.     

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.     

Examining Small Town Revenues: To What Extent Are They Diversified?

How diversified are small town revenues? Revenue diversification is analyzed among towns governed by town meetings. Using previously developed diversification measures, the findings confirm that these localities draw from less diverse revenue streams than other state and local governments. The reasons for these variations include differences in home rule status as well as tax and expenditure limitations imposed by states. The authors suggest that revenue allocation in these jurisdictions is substantively different from other forms of local government because these communities rely much less on sales taxation than states and municipalities. Their essay proposes possible options for improvement, along with other criteria by which small towns can assess their revenue diversification.     

New Hampshire's tax-base limits: An example of the Leviathan model

This study views the lack of an income tax on wages and salaries and a general sales tax in New Hampshire as tax-base limits. I use the Leviathan model to analyze the differences between the fiscal system in New Hampshire and the fiscal systems in Vermont, Maine, and Massachusetts. Vermont, Maine, and Massachusetts do not have the tax-base limits that New Hampshire has. From 1957 to 1989, New Hampshire had lower state and local government tax and expenditure levels than the other three states, more rapid population growth, lower welfare expenditures but comparable levels of expenditures for several of the major public services, and a more competitive structure of state and local government.     

Taxation and local government accountability in a clientelist context: Colombia

Increasing the accountability of local government is an important objective of decentralisation. One way to achieve greater accountability is to enhance the reliance of local governments on locally raised taxes. Property taxes are a prime source of increased revenue for local governments. However, it is difficult to levy them effectively in clientelist political systems, like that of Colombia. Recent reforms there have increased the capacity of municipal governments to raise revenue through property taxation. Giving responsibility for assessments of property values to an independent national agency has been especially useful. Municipal government finances are now to some degree independent and protected from the influence of clientelistic political parties. However continuing problems include: the reluctance of mayors to enforce taxation liabilities; the obstacles to opening local political debates on taxation; and the problems faced by national governments in trying to monitor municipal revenues and expenditures. Copyright © 2003 John Wiley & Sons, Ltd.     

State Tax and Expenditure Limitations: There is No Story

Out of the troubled economic atmosphere of the late 1970's grew a discontent with government in general and taxation in particular. The tax revolt took hold at the local level and placed limits on the growth of the property tax through celebrated citizen initiatives like Proposition 13 in California. At the national level, uneasiness with the role of government and a sense that taxation was too high culminated in 1980 with the election of Ronald Reagan. The electorate embraced promises of less government and lower taxes. For states, the tax revolt resulted in a number of state tax and expenditures limitations (TELS). Most had several things in common: they were adopted before 1983, they addressed state appropriations, and they were largely a western phenomenon spreading from California. The overall condition of state economies and structure of state tax systems, in combination with the sensitivity of policymakers to anti-tax sentiment, have done more to limit state spending than have imposed restrictions.     

State and Local Fiscal Sustainability: The Challenges

At the state and local level, fiscal sustainability is the long‐run capability of a government to consistently meet its financial responsibilities. It reflects the adequacy of available revenues to ensure the continued provision of the service and capital levels that the public demands. After examining separate revenue and expenditure trends for state and local governments, this article identifies three specific sets of pressures that affect subnational fiscal sustainability—cyclical, structural, and intergovernmental. It then presents three specific examples of these pressures: Medicaid, pensions and retiree health benefits, and infrastructure. The author asserts that without changes in the fiscal system—in both revenues and expenditures—state and local fiscal sustainability will disappear. It concludes with some potential solutions but argues that the most difficult reform is to ensure that the public understands that there is no such thing as a free lunch.     

Unfunded Mandates and Fiscal Structure: Empirical Evidence from a Synthetic Control Model

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.     

Structure of State‐Level Tax and Expenditure Limits

While much consideration has been given to the approval process, base classification, and codification of tax and expenditure limits (or TELs), these factors tell us nothing about how they actually work. This study focuses exclusively on the technical elements of these limits and finds how states estimate their limits have over time eroded their potency. More specifically, if a state resets or rebases its limit annually by using actual revenues or expenditures for the preceding year, the limit will trend closely with actual revenues or expenditures, effectively restricting growth in spending as prescribed by law. However, if the law requires a state to estimate its limit using the appropriation limit for the preceding year instead of actual revenues or expenditures, that is, without rebasing, the limit will reflect cumulative changes to the base when it was first approved. Over time, the TEL cap is significantly above the states revenues or expenditures as it remains unaffected by the state's underlying fiscal and economic environment.     

Tax and Spending Effects of Municipal Enterprises: The Case of Florida Electric Utilities

This study tests the appropriateness of two competing hypotheses drawn from the public finance literature about the impact of municipal utility profits on local tax and spending patterns. By comparing data from cities that own their electric utilities to nonelectric cities, this research finds that neither city expenditures nor property tax rates are significantly affected by the transfer of profits. The evidence suggests that the profits are used by cities with relatively weak tax bases to obtain revenues from tax-exempt institutions, homeowners, and nonresidents.     

An examination of the causal relationship between government spending and revenue: A cointegration analysis

This paper tests the validity of the proposition that there is a causal relationship between government expenditure and government revenue for Greece over the period 1957–1993. The empirical analysis employs tests of cointegration as pre-tests for Granger tests of causality. The empirical evidence suggests that there is a long-run relationship between government spending and government revenue and expenditures cause revenues.     

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.     

Urban local government finance in Nigeria: The case of Onitsha local government

Onitsha, located along the route that connects south-western and south-eastern Nigeria, has a very financially dynamic local government. Over one-quarter of the total revenues of this local government come from its market and motor parks. This is an unusual source for a local government that has perhaps the largest per capita revenue in Nigeria—almost N40, compared with the national average of N4.9. The procedure for collecting this revenue is regarded as highly successful since there is greater reliance on the citizens than tax officials. The volume of revenues collected has allowed the council maintain a large surplus revenue over a long period of time, which enables it to carry out important programmes of primary and adult education. It is also beginning to develop its property revenue collection system in collaboration with the Anambra State government.     

Do State‐Funded Property Tax Exemptions Increase Local Government Inefficiency? An Analysis of New York State's STAR Program

This study tests the effects of a growing form of indirect state aid—state‐supported property tax exemptions—on local government efficiency. We hypothesize that larger exemptions, by lowering the effective tax price paid by local homeowners and thus their incentive to monitor efficiency, will reduce local government efficiency. We test this hypothesis by examining the introduction of New York State's large state‐subsidized property tax exemption program, which began in 1999. We find evidence that, all else constant, the exemptions have reduced efficiency in districts with larger exemptions, but the effects appear to diminish as taxpayers become accustomed to the exemptions.