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Making Mountains of Debt Out of Molehills: The Pro-Cyclical Implications of Tax and Expenditure Limitations

28 Pages Posted: 19 May 2010  

Mathew D. McCubbins

Department of Political Science and Law School, Duke University

Ellen Seljan

Lewis & Clark College

Date Written: May 18, 2010

Abstract

This paper presents evidence that property tax limits have detrimental effects on state and local revenues during recessions. Property tax limits cause states to rely on income-elastic revenue sources, such as the income tax or charges and fees. Greater reliance on these revenue sources results in greater revenue declines during economic downturns. We present analysis of time-series, cross-sectional data for the U.S. states for each of these conclusions. Our results suggest that states would have fewer and more modest financial problems during economic downturns if they did not enact property tax limitations.

Keywords: tax and expenditure limits, tax elasticity, state and local revenue policy

JEL Classification: H20, H71

Suggested Citation

McCubbins, Mathew D. and Seljan, Ellen, Making Mountains of Debt Out of Molehills: The Pro-Cyclical Implications of Tax and Expenditure Limitations (May 18, 2010). Available at SSRN: https://ssrn.com/abstract=1611183 or http://dx.doi.org/10.2139/ssrn.1611183

Mathew D. McCubbins

Department of Political Science and Law School, Duke University ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Ellen Seljan (Contact Author)

Lewis & Clark College ( email )

0615 SW Palatine Hill Road
Portland, OR 97204
United States

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