Impact of State-Level Tax and Expenditure Limits (TELs) on Government Revenues and Aid to Local Governments

Abstract

This article investigates the impact of state-level tax and expenditure limits (TELs) on state government revenues and aid to local governments. Using an instrumental variable approach to control for endogeneity, the authors find that the general fund TELs (i.e., revenue and expenditure limits) have led to substantial increases in tax and nontax revenues. States with procedural limits (i.e., those with voter approval and/or legislative supermajority requirements votes) have significantly lower tax revenues. For states with these procedural limits, their ability to impose new or higher taxes is limited by the rules for passing such legislation. This study also finds that states with general fund TELs have higher levels of aid to local governments, while those with procedural TELs have lower levels of aid. Local government property tax limits do not have any impact on taxing authority of states and have only marginal impacts on the state-aid programs.