For Whom the TEL Tolls: Can State Tax and Expenditure Limits Effectively Reduce Spending?

Abstract:     
Can voters stop state governments from spending at high rates through the enactment of tax and expenditure limits (TELs), or do these laws become dead letters? We draw upon the principal-agent literature to theorize that TELs - one of the most frequent uses of the initiative process across the country - may be circumvented by the sorts of elected officials who would inspire their passage.

In order to investigate our claim, we conduct an event study. First, we test for the effectiveness of TELs across states using a differences-in-differences model. Second, we dissect our treatment variable using different legal provisions of the limits to test whether there is a uniform effect across different types of TELs. Finally, we compare state fiscal patterns before and after adoption on a state-by-state basis. Using this simple approach and other methods, we show that TELs are largely ineffective, and that state officials can circumvent them by raising money through fees or borrowing. Our finding is consistent with recent studies showing that policies passed through direct democracy can often be thwarted by the politicians charged with implementing them.

Number of Pages in PDF File: 49

Keywords: tax and expenditure limits, initiatives, referenda, agency problems, state politics

working papers series