T.E.L. It Like It Is: Do State Tax and Expenditure Limits Actually Limit Spending?

George Mason University – Mercatus Center Working Paper No. 10-71

34 Pages Posted: 31 Mar 2011

See all articles by Matthew D. Mitchell

Matthew D. Mitchell

Fraser Institute; Knee Center for the Study of Occupational Regulation; Mercatus Center at George Mason University

Date Written: December 29, 2010

Abstract

State and local government spending has grown at a remarkable pace in the years since World War II. Many states have attempted to arrest this growth by adopting tax or expenditure limitations (TELs). These are formal rules – either codified in statutes or in state constitutions – that limit the growth of government budgets by a particular formula. Twenty-seven states currently operate under TELs, though there is considerable variation in their design and application. In this paper, I examine the impact of TELs on government spending. I focus on the details of their design and on the circumstances in which they are applied. I find that some varieties of TELs can decrease state spending as a share of state income, but the effect is small – in the range of about 2 to 3 percent. Some TELs, such as the most common variety, are associated with less spending in low-income states but are actually associated with more spending in high-income states. Certain characteristics can make TELs more effective. These include constitutional (as opposed to statutory) codification, a focus on spending rather than on revenue, a provision that automatically and immediately refunds surpluses, and – of particular importance – a provision that requires either a super-majority vote or a public vote for override.

Keywords: Tax and Expenditure Limits, State Spending, Institutions

JEL Classification: C23, H72, H11

Suggested Citation

Mitchell, Matthew D., T.E.L. It Like It Is: Do State Tax and Expenditure Limits Actually Limit Spending? (December 29, 2010). George Mason University – Mercatus Center Working Paper No. 10-71, Available at SSRN: https://ssrn.com/abstract=1798865 or http://dx.doi.org/10.2139/ssrn.1798865

Matthew D. Mitchell (Contact Author)

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