Effects of State-Imposed Tax and Expenditure Limitation on Municipal Revenue Structure: A Legal Approach
Abstract This study demonstrates a new way of examining the effects of institutional constraints on local policy making. The way through which state-imposed tax and expenditure limits (TELs) affect municipal fiscal policies depends on both the terms and conditions of the limits, and the actual municipal revenue level. The majority of TEL literature assumes the same TEL type has the same degree of stringency, and that there is little variation across time. This study introduces a replicable rigorous legal research method to policy studies, and examines various aspects of TELs and their evolution over time, including maximum allowable rates for growth, TEL exemptions, and overriding processes. The report illustrates the complexity of the mechanism through which TELs constrain municipal property taxation. With the TEL law data, I constructed an index, “TEL leeway”, to indicate how much room is left for additional property tax growth given the legal levy ceiling and the current levy level. Using a sample of 100 cities from 1995 to 2011, I then empirically examined the effects of TELs on various aspects of municipal revenue structure using TEL leeway. The findings suggest that stringent TELs result in higher revenue reliance on non-tax sources such as user fees, and do not increase the reliance on alternative tax sources such as sales taxes. However, the extent to which TEL stringency affect revenue structure is very small. On the other hand, when TELs are measured by the presence of limit types, the findings confirm the conventional theory that cities subject to TELs rely less on property taxes. The contradictory findings suggest that how TELs affect municipal property taxation may be more complicated than one expects.
SubjectTax and Expenditure Limitation