Cheating on Their Taxes: When are Tax Limitations Effective at Limiting State Taxes, Expenditures, and Budgets?

Abstract

Tax limitations (TLs) represent a class of lawmaking that often pits voters against the incentives of their elected representatives. Thus, are voter backed TLs successful in changing state government fiscal behavior? Using agency theory, we discuss how TLs will likely be ineffective at their stated goals in the face of hostile legislative interests. We test the effectiveness of these measures through use of the Synthetic Control Method presented by Abadie, Diamond, and Hainmueller (2010), which allows us to analyze the passage of TLs in each state individually by comparing them to constructed counterfactuals that estimate what constant-level taxes would have been in each state had its TL never been passed. Using this approach, we show that these TLs are almost always ineffective at reducing taxes or expenditures. This result is consistent with recent studies that highlight the ineffectiveness of initiatives. We will argue that the ineffectiveness of TLs is also true generally, for the same reasons that initiatives are typically ineffective in that there is no means for the people to implement, oversee, or enforce the limits and legislatures will often be unwilling to enforce these limitations themselves.

Keywords: direct initiatives, taxes, synthetic control method, fiscal behavior, agency theory