Institutional Constraints, Rule-Following and Circumvention: Tax and Expenditure Limits and the Choice of Fiscal Tools During a Budget Crisis

Abstract

One of the critical questions in local public budgeting and finance is how the confluence of two major developments in the local public sector — the proliferation of tax and expenditure limits or TELs and the widespread budget crisis precipitated by the Great Recession — has affected local governments across the country. This research examines how TELs shape the fiscal behavior of municipal governments, specifically the pattern of use of different fiscal tools to respond to a major budget crisis. The fiscal tools available to local governments to address fiscal shocks include personnel-related budget cuts, service-related cuts, revenue-raising responses, efficiency reforms, fund balance and inter-fund transfer, external borrowing, and inter-governmental approaches. To what extent did cities rely on specific tools and how did TELs influence cities’ fiscal choices? Using the results of a 2015 national survey of municipal governments in the U.S. with a population of 50,000 or more, this study shows that TELs have shaped the fiscal choices of cities in ways that can potentially redefine the relationships among city governments, their workforce, and citizens.

Keywords: Fiscal institutions, tax and expenditure limits, budget crisis, municipal fiscal toolbox

JEL Classification: H70