Does the Stringency of State Tax and Expenditure Limitations Discourage Political Manipulation in Fiscal Reserves?

• Published date: 01 May 2021
• Author: Seeun Ryu,Inyoung Cho,Jiseul Kim
• Date: 01 May 2021
• DOI: http://doi.org/10.1111/puar.13306

Research Article

Does the Stringency of State Tax and Expenditure Limitations Discourage Political Manipulation in Fiscal Reserves? 375

Abstract: This article examines how state tax and expenditure limitations (TELs) affect the size of fiscal reserves

over election cycles. Using a panel data set of 47 U.S. states from 1986 to 2013, we find that the persistent

pattern of electoral cycles in general fund balances (GFBs) disappears in states with stricter TELs. Regarding a

budget stabilization fund balances (BSFs), the preelection and election downward effect diminishes and becomes

statistically insignificant while the postelection upward effect increases and becomes significant in states with

stricter TELs. Our findings reveal that the stringency of TELs not only eliminates electioneering’s impact on GFBs

but also coincides with increases in BSFs, particularly in postelection years. Consistent with the principal–agent

theory, politicians tend to use a budget stabilization fund (BSF) as a secondary saving account to circumvent

stronger TELs and save more BSFs after elections.

Evidence of Practice

• Our promising finding is that the states with more stringent TELs spend less GFBs as elections approach.

The finding implies that the stricter TELs can discourage the political game with GFBs in preelection and

election years.

• However, states with stricter TELs tend to save BSFs more than necessary after elections. This finding raises

a concern that politicians can avoid the restrictiveness of TELs and use a BSF as a secondary saving account,

reinforcing the existing ending balances for their electoral gain.

• The attempt to reform current TELs to be more stringent can open another door for politicians to play with

BSFs. Hence, the states that plan to increase their TEL stringency should inform voters of its possible impact

on levels of BSFs. This helps voters choose politicians who do not use “gamesmanship.”

• Our research also suggests that the restrictive uses of BSFs can safeguard against opportunistic saving

behavior in postelection years. In our empirical results, states that adopted BSF with the withdrawal formula

have lower BSFs after elections than the states with more discretionary withdrawal rules.

Accumulating budget surpluses during periods

of economic expansion is vital to stabilizing

the economy and smoothing out fiscal shocks

of economic recession (Barro1979; Hou2013).

Also, surpluses saved during the expansion periods

generate additional benefits such as preventing future

cash flow problems, preparing for contingency needs,

and improving government credit ratings (Rose

and Smith2012). We argue that advocates of state

countercyclical policies overlook the rational election

behavior of leaders who use surpluses for their own

benefit.

The Pew Charitable Trusts ([PEW]2014) reports,

however, that only a handful of states had sufficient

fiscal reserves by the late 2010s and most states had

failed to tie their reserves to the forecasted revenue

volatility. PEW(2014) also reports that state leaders

did not consider revenue volatility when they had

to decide when and how much to save in reserves.

Instead, they simply transferred available surplus to

the reserve accounts at the end of every fiscal year.

This left the states unprepared to cope with the fiscal

stresses of the Great Recession of 2008. Hou(2013)

argues that if state governments need to smooth

financial operations, especially for lean years, the

governments should design and implement fiscal

policies to maintain sizable reserves.

Why do state leaders not implement precautionary

savings? Are precautionary savings difficult to

implement in practice? Political budget cycle

(PBC) theory argues that incumbents manipulate

state budgets to maximize a chance to win their

reelections by exploiting reserves during elections

(Nordhaus1975). According to the PBC theory,

incumbents tend to increase spending as their

elections approach and delay tax increases until

Does the Stringency of State Tax and Expenditure Limitations

Discourage Political Manipulation in Fiscal Reserves?

Seeun Ryu

Inyoung Cho

Jiseul Kim

Institute of Governmental Studies (IGS),

Korea University

National Assembly Futures Institute (NAFI)

Arkansas State University

Jiseul Kim is an assistant professor in the

Department of Political Science at Arkansas

State University. Her research is in the

areas of public budgeting and financial

management with emphasis on fiscal and

political institutions, capital budgeting and

management, and government accounting

and financial reporting.

Email: jikim@astate.edu

Inyoung Cho is an associate research

fellow at the National Assembly Futures

Institute (NAFI), South Korea. Her research

focuses on comparative political economy

of inequality and social policy, labor market

institutions, and public finance. She received

her doctoral degree in politics from the

University of Oxford.

Email: inyoung_cho@korea.ac.kr

Seeun Ryu is a research associate in

the Institute of Governmental Studies at

the Korea University. She holds a PhD in

public administration and policy from the

School of Public Affairs at the Arizona State

University. Her research is in the field of

public budgeting and financial management

with focus on taxation, revenue forecasting,

fiscal reserves, and fiscal institutions.

Email: senryu1206@gmail.com

Public Administration Review,

Vol. 81, Iss. 3, pp. 375–388. © 2020 by

The American Society for Public Administration.

DOI: 10.1111/puar.13306.