When Does the Ballot Box Limit the Budget? Politics and Spending Limits in California, Colorado, Utah and Washington

Abstract:     
Can voters stop governments from spending too much through the enactment of tax and expenditure limits (TELs), or do these laws become dead letters? We examine the effectiveness of TELs - one of the most frequent uses of the initiative process across the country - by viewing them as an attempted solution to a principal-agent problem. Voters are principals who want to constrain the spending habits of their agents, elected officials. Drawing on the lessons of the principal-agent literature yields two insights that structure our study. First, in order to evaluate the effects of TELs, we collect data that provides a comprehensive look at state finances for all 50 states. Our research design departs from much of the recent literature. Rather than simply analyzing state spending levels, we look at changes in combined state and local expenditures, money raised through charges and fees, state debt levels, and state credit ratings. We conduct time series analyses within states that change their fiscal institutions, rather than cross-sectional analyses across states with different rules and fiscal trends. We perform a pre-test by observing a state's fiscal behavior prior to the enactment of a TEL and a post-test by taking observations in the years after the treatment was applied. This allows us to isolate the effect of a TEL while holding other state characteristics constant, thus avoiding the endogeneity problem encountered by much of the previous literature. Our analysis includes an evaluation of whether or not TELs changed state finances as well as a more nuanced consideration of the scale of any such changes. Second, in order to predict which if any TELs will be most effective, we focus less on the letter of the law than on the conditions of its passage. While previous works emphasize the importance of specific legal provisions, we hypothesize that a TEL's success will be determined by the method through which it was passed, the preferences of the lawmakers that it attempts to bind, and the ease of amending the state's constitution.

Number of Pages in PDF File: 49

Keywords: tax and expenditure limits, state politics, initiative, referenda, state budget, taxation

JEL Classification: D72, D82, H71, H72

Accepted Paper Series