Tax and Expenditure Limits for Long-Run Fiscal Stability
George Mason University Mercatus Center Working Paper No. 61
4 Pages Posted: 1 Nov 2009
Date Written: October 28, 2009
In the private sector, the profit and loss mechanism signals firms the need to adjust their production and costs quickly to changes in demand and revenue. In contrast, in the public sector, no such tool is available to adjust spending to changing conditions. Instead policy makers have incentives to increase government spending year after year, regardless of tax collection.
In the current recession, many states are experiencing decreased revenues. Because government services have grown unchecked, they now must make painful and unpopular cuts. California, Arizona, and New Jersey, among other states, have made headlines in recent months with their drastic measures to close budget shortfalls.
This pattern raises a difficult question: How do we correct for the inflexibility inherent in state expenditure systems to respect tax payers’ desires for government services over time? Some have experienced relative success in this area because of Tax and Expenditure Limits (TELs) that constrain their budgets. While not a perfect solution, binding TELs prevent policy makers from increasing state spending that does not reflect voters’ willingness to pay for government services.
Keywords: Tax and Expenditure Limits
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