Fiscal Institutional Externalities: The Negative Effects of Local Tax and Expenditure Limits on Municipal Budgetary Solvency

Public Budgeting and Finance. 38(3): 3-31 (2018)

Andrew Young School of Policy Studies Research Paper Series No. 19-19

33 Pages Posted: 24 Jun 2019 Last revised: 4 Nov 2019

See all articles by Benedict S. Jimenez

Benedict S. Jimenez

Georgia State University - Andrew Young School of Policy Studies

Multiple version iconThere are 2 versions of this paper

Date Written: 2018

Abstract

This study explores the effects of state-imposed local tax and expenditure limits or TELs on the budgetary solvency of city governments in the US. Most local TELs were enacted in the late 1970s and early 1980s, and have remained largely unchanged in the last three to four decades. These quasi-permanent fiscal institutions do not take into account changes in voters’ fiscal policy preferences across time or the possibility of external fiscal shocks that require flexibility in changing tax and spending policies. Without this flexibility, TELs can lead to poor financial management practices that negatively affect budgetary solvency. The empirical analysis produces strong evidence supporting this argument. Whether TELs are assumed to be exogenously or endogenously determined, the results of the econometric analysis, including various robustness tests, indicate that TELs weaken city budgetary solvency.

Keywords: Tax and Expenditure Limits, Fiscal Institutional Externalities, City Budgetary Solvency, Great Recession

JEL Classification: H7, H72

Suggested Citation

Jimenez, Benedict Salazar, Fiscal Institutional Externalities: The Negative Effects of Local Tax and Expenditure Limits on Municipal Budgetary Solvency (2018). Public Budgeting and Finance. 38(3): 3-31 (2018); Andrew Young School of Policy Studies Research Paper Series No. 19-19. Available at SSRN: https://ssrn.com/abstract=3408839 or http://dx.doi.org/10.2139/ssrn.3408839

Benedict Salazar Jimenez (Contact Author)

Georgia State University - Andrew Young School of Policy Studies ( email )

Atlanta, GA
United States

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