New Fiscal Rules for State and Local Government: A Question of Institutional Complementarity

39 Pages Posted: 7 Nov 2019

See all articles by John D. Merrifield

John D. Merrifield

University of Texas at San Antonio

Barry W. Poulson

University of Colorado Boulder

Date Written: October 28, 2019

Abstract

New fiscal rules, referred to as tax and expenditure limits (TELs), were enacted in many states during the tax revolt launched in the 1970s. Over the past two decades a second generation of TELs, patterned after Colorado’s TABOR Amendment, was introduced in the states. The new fiscal rules have had a limited impact in constraining fiscal policy in the states. Many state and local governments are now incurring debt at an unsustainable rate, and citizens have lost confidence in the ability of these governments to pursue prudent fiscal policies. The problem with new fiscal rules enacted in the states is not just design flaws, it is the absence of complementary institutions that are prerequisites to effective fiscal rules. In this study we focus on three institutional reforms: fiscal autonomy for subnational jurisdictions; capital market and legal reforms to restore bankruptcy procedures for state as well as local government; and strengthening institutions of direct democracy to give citizens more ‘voice’ in enacting fiscal rules and pursuing fiscal policies. New fiscal rules are effective when enacted with broad support within the community, and with effective fiscal rules in place citizens can again gain confidence in their state and local governments. Growing this ‘dynamic credence capital’ will be essential for state and local governments to solve the debt crisis.

Keywords: fiscal rules, tax and expenditure limits, institutions, fiscal policy

JEL Classification: H2, H3, H4, H7

Suggested Citation

Merrifield, John D. and Poulson, Barry W., New Fiscal Rules for State and Local Government: A Question of Institutional Complementarity (October 28, 2019). Available at SSRN: https://ssrn.com/abstract=3476750 or http://dx.doi.org/10.2139/ssrn.3476750

John D. Merrifield

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Barry W. Poulson (Contact Author)

University of Colorado Boulder ( email )

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