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The limits of tax and expenditure limits: TEL implementation as a principal-agent problem

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Abstract

Previous scholarship has shown that Tax and Expenditure Limits (TELs) often fail to constrain government growth. This paper views the implementation of TELs as a principal-agent problem. Agency theory predicts that delegation is affected by the preferences of agents and the costs of monitoring those agents. Using panel data for the US states from 1970 through 2008, I conduct an empirical test of the validity of the principal-agent model for TELs. I find that state spending limitations are only effective at cutting the growth of state and local spending under the direction of agents who have a preference for limited government. Additionally, state property tax limitations are only effective when monitoring does not require costly coordinated action. These findings contradict an alternative theory of TEL implementation that looks towards the policy’s origin. My research suggests that the arrangements of delegation determine when and under what conditions TELs effectively reduce government growth.

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Notes

  1. The strong relationship between TELs and the initiative and referendum processes presents a potential for collinearity. A mean variance inflation factor (VIF) of one suggests that this is not a serious problem for this analysis.

  2. The principals that enact the policy, a policy purposively meant to constrain future action, are the emphasis of this paper. Undoubtedly, future voters living under the restrictions of these policies are a second set of principals whose demands agents must reconcile as well. A thorough discussion of the multiple principal problem is beyond the scope of this paper (see, for example, Spiller 1990 and Waterman and Wood 1993). For the purposes on this paper I make the explicit assumption that the principals of consequence are those enacting the TEL and that those principals intended to implement effective limitations.

  3. See Ferejohn and Krehbiel (1987), von Hagen (2002), and Serritzlew (2005) for precedents on the adoption of effective fiscal rules.

  4. See Poterba and Rueben (1999) for a lengthier discussion of the difference between binding and nonbinding TELs. The coding of TELs is original and the codebook is available from the author upon request.

  5. Estimates for 2001 and 2003 were derived from multiple imputation (using leads, lags, state general expenditures, and socioeconomic variables), as the Census did not collect estimates for local government finances in those years.

  6. I choose not to use growth rates of ideology for theoretical reasons. An unchanging conservative government might make incremental cuts to the size of government over time. There are a number of practical reasons for this behavior. For example, it is easier to make personnel cuts through attrition. There are also considerable non-discretionary components of spending (public employee contracts, for example) that cannot reasonably be eliminated immediately. In this regard, no change in ideology is needed to produce changes in the size of government over time. Levels of ideology, rather than percentage changes, are better able to explain decisions on expenditures.

  7. This choice is analogous to the decision to analyze only “binding” spending limits, i.e., those that cannot be usurped by a majority vote.

  8. Berry et al. (2010: 118) describe their measure of citizen ideology as follows, “The citizen ideology measure infers the ideological position of the electorate from the distribution of votes in congressional races and ADA/COPE scores for members of Congress, assuming that voters choose the candidate they perceive as having an ideology closest to their own.”

  9. Analysis available by request from the author.

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Acknowledgements

This author would like to express her thanks to Mathew McCubbins, Thad Kousser, and David Darmofal for their helpful comments and guidance. She also wishes to acknowledge the valuable research assistance of Laura Burroughs and feedback from two anonymous reviewers.

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  1. Lewis & Clark College, 0615 Southwest Palatine Hill Road, Portland, OR, 97219, USA

    Ellen C. Seljan

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Seljan, E.C. The limits of tax and expenditure limits: TEL implementation as a principal-agent problem. Public Choice 159, 485–501 (2014). https://doi.org/10.1007/s11127-013-0063-0

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