Tax and Expenditure Limitations and State Credit Ratings
The impact of state tax and expenditure limitations (TELs) on bond credit ratings is estimated using an incomplete (or unbalanced) panel from the US states from 1973 to 2005. Three indices of the restrictiveness of TELs are used. Both Moodyâ€™s and Standard and Poorâ€™s bond credit ratings are used and the outcomes compared. The results are consistent with previous work; more restrictive revenue TELs are associated with lower credit ratings while expenditure TELs are generally associated with higher credit ratings. TELs restricting both revenues and expenditures are negatively associated with Moodyâ€™ ratings, but not with those of Standard and Poorâ€™s. Contrary to previous studies, the authors find limited differences in the fiscal and economic variables that influence the ratings of the two agencies.
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