Community composition and voter support for tax limitations: evidence from home-rule elections.

• Author: Temple, Judy A.

1. Introduction

   Complaints about high taxes have stimulated taxpayer demands for explicit statutory or constitutional constraints on the taxing and spending powers of state and local governments. Although fiscal controls have long been a part of our system of government in the United States, the recent "Tax Revolt" movement commonly is thought to have its roots in the late 1970s with the approval of Proposition 13 in California. Voter discontent has produced a large number of new controls enacted during the last two decades. Why do voters need to impose explicit tax and expenditure constraints on the actions of their elected officials? A major objective of this paper is to evaluate, in a new setting, the rationale for the existence of tax limitations.

   Direct evidence regarding the determinants of voter support for fiscal limitations is sparse. Despite the persistent clamoring for additional fiscal controls, there have been few empirical studies that address the question of why voters desire tax-and-spend limits. Most of the existing studies were conducted over a decade ago. Citrin [6], Courant, Gramlich, and Rubinfeld [8], and Ladd and Wilson [23] examined micro-based survey data to identify factors that led taxpayers to support state-imposed limitations on local governments. Although these three studies analyzed survey responses about tax limitation efforts in different states, the common findings indicate that support for the constraints comes from individuals who want reduced taxes but prefer the existing level of spending. The responses suggest that limitation supporters either are seeking increased municipal efficiency or, as suggested by Courant et al., are suffering from free-lunch illusion.

   Using state-level data, Ladd [21] investigated the enactment by states of fiscal limits on local governments during the 1970s. She found evidence that high and rising aggregate local property tax burdens in a state increased the probability that the state subsequently imposed fiscal limitations on local governments. More recently, Skidmore and Alm [30] used state-level data over a longer time period to estimate the factors affecting the probability that tax or expenditure limitations were approved in statewide elections. They found mixed evidence on the relationship between high and rising property tax levels and the subsequent enactment of fiscal limits. Their results also suggest that fiscal limits were more likely to be approved by voters in high income states.

   Unlike the other studies, this study analyzes the decisions made by some voters to remove state-imposed statutory constraints on the fiscal decisions of their local governments. Beginning in 1970, residents in many Illinois communities have been able to vote to obtain local home-rule authority instead of allowing their jurisdiction to be constrained by state statutory limits on local taxing and borrowing decisions. Unlike the other studies, this study investigates the role of community composition in influencing local voters' support for the state-imposed constraints. Buchanan and Tullock [5] argue that communities characterized by relatively heterogeneous populations are more likely than homogeneous communities to accept restrictive collective decision-making rules as a means of reducing the costs involved in collective choice. Using a data set of almost 300 communities, this study investigates whether or not state-imposed limits on local fiscal decisions are more likely to be preferred by voters in municipalities with relatively larger intra-community variation in socio-economic characteristics such as income and age. The findings are consistent with the Buchanan and Tullock argument. Moreover, this analysis tests hypotheses regarding the relationship between preferences for state-imposed limits and community median income, the level of property tax revenues, and the recent change in property tax revenues. Finally, this study examines the importance of political characteristics of the cities and villages in influencing voter decisions to delegate to the locality greater taxing and borrowing power.

2. Motivation for Fiscal Constraints Imposed on Local Governments

   The existence of state government controls on local taxing power suggests that local governments collect more than the desired amount of tax revenues. Although the observed level of taxes is determined by the interaction of demand and supply factors, the explanations for why a local government may tax "too much" generally are discussed in terms of supply-side considerations. A principal-agent model can be used to explain why taxpayers desire constraints on the taxing power of their local government. Consider that government decision-makers perform their jobs as agents of the principal-voters. The voters employ the agents to produce government services, but the voters are not able to observe the quantity of services directly. The voters observe the tax bill for the production of government services, where the tax bill is the product of the quantity of government services and the per unit cost of producing that output. While the voters prefer that a particular amount of government services be produced at minimum cost, in the principal-agent framework the government officials have different preferences. In particular, the agents may prefer to produce at a higher cost and/or produce a greater amount of government services. Consequently, fiscal limitations can be imposed to prevent high levels of taxation that arise from excessive government output levels or from cost inefficiencies.(1)

   To the extent that voter dissatisfaction with excessively high taxes is due to the production decisions of local officials whose behavior is difficult to monitor, the imposition of fiscal constraints could be welfare enhancing. Relying on the existence of unresponsive local officials as the explanation for state-imposed fiscal limits is somewhat unsatisfying, however, because students of fiscal federalism generally expect the state level of government to be even less responsive than the local level to the concerns of local voters.(2) An even more perplexing consideration involves the standard efficiency argument for subsidizing or restricting local government spending. Fiscal constraints may be efficient to the extent that they help internalize negative externalities generated by local government expenditures. However, many types of local expenditures are thought to generate positive externalities (e.g., education, water treatment and public safety) and commonly are subsidized rather than restricted by grants-in-aid to local governments.

   The current analysis explores the role of demand-side factors, rather than supply-side factors, in influencing preferences for fiscal constraints. I investigate the possibility that constraints are motivated by the existence of within-community variations in demands for local public services. Although each resident of the community may have a different desired level of local taxes and expenditures, the political process translates individual preferences into a single community demand. Unless the community consists of residents with identical preferences for local public services, many voters will be dissatisfied with the particular level of spending chosen.(3) Although in a perfect Tiebout world taxpayers costlessly sort themselves into municipalities consisting of residents with homogenous preferences for government services, evidence suggests the existence of a large amount of intra-community variation in government service demands [27].

   If fiscal limitations are motivated by voter dissatisfaction with the outcome of the collective decision-making process, then I expect that the limitations are preferred by residents of communities in which there exists substantial variation in individual preferences. This relationship between community composition and the willingness of voters to impose restrictive collective decision-making rules was explained by Buchanan and Tullock in The Calculus of Consent [5]. Buchanan and Tullock argue that a voter in a heterogeneous community is expected to prefer government constraints as a means of reducing the likelihood that the voter may be harmed by collective decisions that are favored by others but are not favored by that particular voter. Buchanan and Tullock refer to this anticipated harm as the "external costs" of collective decision-making, and they explain that these external costs will be lower in homogeneous communities.

   The external costs argument suggests that voters in more homogeneous communities are less likely to impose statutory or constitutional restrictions on the actions of local fiscal decision-makers. Consider the commonly-used median voter model of the demand for public expenditures. That model states that (under certain conditions)(4) the community's demand for government expenditures is the median of the individual demands. The median preferred expenditure level will defeat any other level in a majority rule election. Importantly, however, the median spending level is not the utility-maximizing level for individuals with preferences greater or less than the median.

   Because the median voter model of the demand for government spending takes into account individual rankings of various alternatives but not the intensity of preferences, it is possible that fiscal constraints can increase economic elfare. Two aspects of the pattern of individual demands determine whether or not constraints that reduce spending below the median level are welfare enhancing. First, constraints are more likely to increase welfare if the distribution of individual demands around the median is asymmetrical in a particular way. Specifically, the potential for welfare gains requires that in the case of individuals demanding more than the median amount, the difference between their preferred amount and the median is relatively small compared to...