The Impact of Tax and Expenditure Limitations on Municipal Revenue Volatility

• Author: Tucker C. Staley
• Published date: 01 June 2018
• Date: 01 June 2018
• DOI: http://doi.org/10.1177/0160323X18785211
• Subject Matter: General Interests

General Interest
State and Local Government Review
2018, Vol. 50(2) 71-84
The Impact of Tax and
ª The Author(s) 2018
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DOI: 10.1177/0160323X18785211
Municipal Revenue Volatility
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Tucker C. Staley1
Abstract
Stable revenue flows are paramount for policy makers at all levels of government in order to
effectively and efficiently provide goods and services to constituents. This work examines the
relationship between tax and expenditure limitations (TELs) and municipal revenue volatility. The
current literature suggests that more stringently binding TELs at the state level are associated with
greater levels of revenue volatility. This work tests whether this finding extends to the local level of
government as well. Examining ninety-nine municipalities over eight years (2004–2011), this work
provides evidence that the stringency level of TELs is associated with reduced fluctuations in
municipal revenue streams.
Keywords
tax and expenditure limitations, volatility, municipal government, municipal revenue
Local governments are currently experiencing
Tax Revolt sparked en masse adoption across
the greatest fiscal pressures of any time over the
the American states (Advisory Commission
last fifty years (Miller and Svara 2009). This is
on Intergovernmental Relations [ACIR] 1995).
commonly seen as a result of the changing
One of the most prominent limits that gained
nature of intergovernmental revenues, state
widespread appeal across the American states
mandates, the most recent recession which lead
during this time is tax and expenditure limita-
to sizable reductions in the primary sources of
tions (TELs). TELs are meant to constrain gov-
local government revenue (property and sales
ernment officials by limiting the rate which
tax), and state restrictions (see England, Pelis-
governments may grow (Wildavsky 1979). In
sero, and Morgan 2012; Miller and Svara
order to achieve this end, most TELs attempt
2009; Hoene and Pagano 2009). In regard to
to limit government growth by indexing
state restrictions, after the passage of Califor-
nia’s Proposition 13 in 1978, state governments
began adopting a variety of fiscal limits meant
1 Political Science Department, Eastern Michigan Univer-
to constrain both state and local government
sity, Ypsilanti, MI, USA
officials in their ability to both raise and spend
revenues. While various limits had been experi-
Corresponding Author:
Tucker C. Staley, Political Science Department, Eastern
mented with previous to this time—the first
Michigan University, 601 Pray Harrold, Ypsilanti, MI
attempt at limiting property taxes came in the
48197, USA.
1880s with the development of home rule—the
Email: tstaley2@emich.edu

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72
State and Local Government Review 50(2)
increases in taxing, spending, or both to annual
moderated by other institutions found in the
changes in population size or personal income.
state (Staley 2017). There is also initial evi-
Before the Tax Revolt, only three states had
dence that one specific TEL (Colorado’s Tax-
some form of state-level TEL in place. How-
payer Bill of Rights [TABOR]) is associated
ever, by 2005, thirty-three states had adopted
with greater volatility of local government dis-
these limits for state officials (Staley 2015).
tricts in Colorado (St. Clair 2012). This current
Currently, most TELs place restrictions on both
work explores how state-imposed TELs aimed
state and local levels of government. In 1991,
at restricting municipal governments impact
thirty-four states restricted local governments
revenue volatility for municipalities across the
through the use of TELs (Mullins and Joyce
United States. This work uses data that cover
1996), and by 1995, only four states had not
ninety-nine municipalities from 2004 to 2011
adopted TELs for their local governments
and specifically tests whether the strin-
(CT, ME, NH, and VT; ACIR 1995). Today,
gency—or how binding—a TEL is impacts the
forty-eight states currently have TELs enacted
volatility of various municipal revenue streams.
on their local governments.
This work first provides a brief overview of
Given the prominence of state-imposed
the literature regarding the impact of TELs and
TELs on municipalities and the current pres-
local response to TEL adoption. Based on the
sures faced by local governments, it is impor-
literature, the work then provides a hypothesis
tant to understand how this fiscal limit
for the expected relationship between TELS
impacts local fiscal environments. Fiscal flexi-
and municipal revenue volatility. Following
bility, capacity, and general operating position
this is a discussion of the important variables
are the most common measures when examin-
included in the analysis, and how the analysis
ing local government fiscal conditions (see
is conducted. Finally, results of the analysis are
Maher and Deller [2012] for a detailed discus-
provided before offering concluding comments
sion). However, there has been a growing inter-
and discussion.
est regarding the importance of revenue
volatility when assessing the fiscal conditions
TELs
of governments (Crain 2003; St. Clair 2012;
Staley 2015, 2017). At its core, the concept of
Between 1978 and 1990, the American states
revenue volatility is a measure of the stability
adopted sixteen new laws or constitutional pro-
of revenue streams. As such, highly volatile
visions, on average, which provided guidance
revenue streams increase the difficulties associ-
and/or restrictions for local governments
ated with long- and short-term planning for
(ACIR 1993). Many of these new laws directly
government officials, lead to “manic-
related to local government fiscal decision-
depressive patterns of taxing and spending”
making. For instance, by 1990, forty-eight
(Thompson and Gates 2007, 825), and as Crain
states had placed debt limits on local govern-
(2003) notes, “volatility is the enemy of
ments, thirty-nine states required a referendum
efficiency.” This concept is increasingly impor-
for bond issues, forty-eight states set property
tant for local governments, given the historic
tax rules and/or rates, thirty-eight states directly
high fiscal pressures they are currently experi-
set property tax limits on municipal govern-
encing during the era of “fend-for-yourself fed-
ments, and thirty-eight states required enacting
eralism.” Stable revenue flows are paramount
an annual operating budget (ACIR 1993).
for policy makers at all levels of government
Today, forty-eight states have TELs in place
in order to effectively and efficiently provide
targeted at municipal governments.
goods and services to their constituents.
The rationale behind TEL adoption (along
At the state level, recent research suggests
with other fiscal limits) follows the Leviathan
that TELs are associated with greater levels of
philosophies (Niskanen-Buchanan-Tullock)
volatility in state revenue streams (Staley
that government is inherently inefficient
2015, 2017); however, this impact may be
because of the lack of competition and

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Staley
73
competitive market forces (Maher, et al. 2016).
manifest (Carr 2006; Figlio and O’Sullivan
Therefore, TELs are intended to force disci-
2001; Skidmore 1999; Springer et al. 2009).
pline on local governments and increase bud-
Such unintended impacts include cities manip-
getary certainty. Municipal TELs were
ulating their services to put pressure on citizens
designed to (1) control and reduce property
to override statewide fiscal limits (Figlio and
taxes, (2) control the growth of government and
O’Sullivan 2001), reduced fire service quality
public spending, and (3) improve fiscal
(Doyle 1994), increased student–teacher ratios
accountability (ACIR 1995). The most com-
and reduced test scores (Downes and Figlio
mon categories of TELs include limits on the
1999), reduced teacher quality (Figlio and Rue-
overall property tax rate, specific property tax
ben 2001), reduced math scores (Downes, Dye,
rates, property tax levies, general revenue or
and McGuire 1998; Lewis 2000; MacManus
expenditure increases, assessment increases,
1981), greater reliance on special districts (Carr
and truth-in-taxation measures (ACIR 1995).
2006; Burns 1994; Foster 1997), and reduced
ability to respond to citizen demands (Mullins
and Joyce 1996).
General Impact
Overall, most studies on TELs suggest they
TELs and Volatility
have been somewhat ineffective at their
intended goals (ACIR 1995; Figlio and O’Sul-
Directly aimed at understanding the connection
livan 2001; Skidmore 1999; Carr 2006). Most
between TELs and local revenue volatility, St.
studies find that TELs are ineffective at con-
Clair (2012) examines the effect of TABOR
trolling growth (Abrams and Dougan 1986;
(Taxpayers Bill of Rights) on local govern-
Cox and Lowery 1990; Bails 1990; Wallis and
ments in Colorado after voters approved its pas-
Weingast 2006) because governments shift
sage in 1992. Using panel data retrieved from
their tax structures to get around them (Piper
Colorado’s Division of Local Government and
2000), or they have never been truly binding
the Census Bureau’s Annual Survey of State
(Kousser, McCubbins, and Moule 2008). How-
and Local Government Finances, he compares
ever, other works provide evidence that spend-
the volatility of local governments in Colorado
ing limits are associated with reduced tax
to a series of “control” states that have not
growth (Elders 1992), state spending is lower
adopted TELs for...