Fiscal Rules.

• Author: Van Doren, Peter
• Position: Working Papers: A SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION'S READERS - Can Fiscal Rules Constrain the Size of Government? An Analysis of the 'Crown Jewel' of Tax and Expenditure Limitations - Book review

"Can Fiscal Rules Constrain the Size of Government? An Analysis of the 'Crown Jewel' of Tax and Expenditure Limitations," by Paul Eliason and Byron Lutz. April 2015. Journal of Public Economics 166: 115-144 (October 2018).

To the extent that state and local governments impose taxes that have diffuse costs and enact programs that have concentrated benefits, standard economic analysis would predict excessive taxing and spending. A standard political remedy to this tendency has been statutory or constitutional limits on taxation and expenditure.

The "gold standard" of such limitations is the constitutional amendment approved by 54% of Colorado voters in 1992. The Taxpayer Bill of Rights (TABOR) requires voter approval for all state and local tax-rate increases and limits real per-capita revenue growth to either 0% or the increase from construction in local taxable property.

Did TABOR constrain public tax and expenditure behavior in Colorado? This paper compares the state's expenditures and revenues with those in other states using the synthetic control method, a recent development in econometrics. The idea is that a linear combination of states that minimizes differences on expenditures and taxes between Colorado and the synthetic "states" prior to the implementation of TABOR is a superior control than the actual states themselves.

Prior to the invention of synthetic controls, the change in Colorado outcomes would have been compared to the change in other states, allowing for unobserved differences across states that are constant and do not vary with time...