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

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  • Benedict S. Jimenez

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.

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  • Benedict S. Jimenez, 2018. "Fiscal Institutional Externalities: The Negative Effects of Local Tax and Expenditure Limits on Municipal Budgetary Solvency," Public Budgeting & Finance, Wiley Blackwell, vol. 38(3), pages 3-31, September.
    • Handle: RePEc:bla:pbudge:v:38:y:2018:i:3:p:3-31
    DOI: 10.1111/pbaf.12194
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    Cited by:

    1. Mark Davidson, 2020. "Extreme municipal fiscal stress and austerity? A case study of fiscal reform after Chapter 9 bankruptcy," Environment and Planning C, , vol. 38(3), pages 522-538, May.
    2. Matthew Walshe, 2019. "Does Local Government Autonomy Promote Fiscal Sustainability? Lessons from Illinois," IMFG Papers 42, University of Toronto, Institute on Municipal Finance and Governance.
    3. Soyoung Park & Sungchan Kim, 2022. "The Effects of Fiscal Rules Based on Revenue Structure: Evidence from U.S State Governments," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 763-781, October.
    4. Benedict S. Jimenez & Whitney B. Afonso, 2022. "Revisiting the theory of revenue diversification: Insights from an empirical analysis of municipal budgetary solvency," Public Budgeting & Finance, Wiley Blackwell, vol. 42(2), pages 196-220, June.

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