Impact of Tax and Expenditure Limitations on Local Government Savings

  • Sharon N. Kioko
Part of the Studies in Public Budgeting book series (SIPB, volume 2)


Local governments serve a pivotal role in the delivery of public services. However, since the late 1970s, their ability to deliver essential public services has been curtailed by widespread adoption of limits on taxing and/or spending authority. Studies show these limits fundamentally altered the fiscal landscape of municipal governments. Using data on county governments for the period 1970–2004, this analysis shows TELs had a negative impact on unrestricted cash reserves. This has wide-ranging implications on fiscal performance including the government’s ability to cope with negative revenue and expenditure shocks and their ability to retain resources for strategic purposes.


Free Cash Flow County Government Slack Resource Cash Reserve Reserve Fund 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Anderson NB (2006) Property tax limitations: an interpretative review. Natl Tax J 59(3):685–694Google Scholar
  2. Baum CF, Schaffer ME, Stillman S (2003) Instrumental variables and GMM: estimation and testing. Department of Economics, Boston College, BostonGoogle Scholar
  3. Bennett J, DiLorenzo TJ (1982) Off-budget activities of local government: the bane of the tax revolt. Public Choice 39(3):333–342CrossRefGoogle Scholar
  4. Benson ED, Marks BR (2010) Dueling revenue caps and municipal bond yields: the case of Houston, Texas. Public Budg Finance 30(2):112–133CrossRefGoogle Scholar
  5. Benton JE (2005) An assessment of research on American counties. Public Adm Rev 65(4):462–474CrossRefGoogle Scholar
  6. Benton JE, Byers J, Cigler BA, Klase KA, Menzel DC, Salant TJ, Streib G, Svara JH, Waugh WL (2007) Conducting research on counties in the 21st century: a new agenda and database considerations. Public Adm Rev 67(6):968–983CrossRefGoogle Scholar
  7. Berry WD, Ringquist EJ, Fording RC, Hanson RL (1998) Measuring citizen and government ideology in the American states. Am J Polit Sci 42(1):327–348CrossRefGoogle Scholar
  8. Boehmke FJ (2005) The indirect effects of direct legislation: how institutions shape interest group systems. The Ohio State University Press, ColumbusGoogle Scholar
  9. Bradbury KL, Mayer CJ, Case KE (2001) Property tax limits, local fiscal behavior, and property values: evidence from Massachusetts under Proposition 21/2. J Public Econ 80:287–311CrossRefGoogle Scholar
  10. Brennan G, Buchanan JM (1979) The logic of tax limits: alternative constitutional constraints on the power to tax. Natl Tax J 32:11–22Google Scholar
  11. Carr JB (2006) Local government autonomy and state reliance on special district governments: a reassessment. Polit Res Q 59(3):481–492CrossRefGoogle Scholar
  12. Carroll DA (2005) Are state governments prepared for fiscal crises? A look at revenue diversification during the 1990’s. Public Finance Rev 33(5):603–633CrossRefGoogle Scholar
  13. Carroll DA, Johnson T (2010) Examining small town revenues: to what extent are they diversified? Public Adm Rev 70(2):223–235CrossRefGoogle Scholar
  14. Clingermayer JC, Dan Wood B (1995) Disentangling patterns of state debt financing. Am Polit Sci Rev 89(1):108–120CrossRefGoogle Scholar
  15. Cornia GC, Walters LC (2005) Full disclosure: unanticipated improvements in property tax uniformity. Public Budg Finance 25(3):106–123CrossRefGoogle Scholar
  16. Dye RF, McGuire TJ, McMillen DP (2005) Are property tax limitations more binding over time. Natl Tax J 58(2):215–225Google Scholar
  17. Fitch (2002) The 12 habits of highly successful finance officers. Fitch Ratings, New YorkGoogle Scholar
  18. GASB (2009) Fund balance reporting and governmental fund type definitions. Governmental Accounting Standards BoardGoogle Scholar
  19. Gianakis G, Snow D (2007) The implementation and utilization of stabilization funds by local governments in Massachusetts. Public Budg Finance 27(1):86–103CrossRefGoogle Scholar
  20. Gordon TM, Rueben K (2010) The best of times or the worst of times? How alternative revenue structures are changing local government. In: Ingram GK, Hong Y-H (eds) Municipal revenues and land policies. Lincoln Institute of Land Policy, CambridgeGoogle Scholar
  21. Gore AK (2009) Why do cities hoard cash? Determinants and implications of municipal cash holdings. Account Rev 84(1):183–207CrossRefGoogle Scholar
  22. Hendrick R (2006) The role of slack in local government finances. Public Budg Finance 26(1):14–46CrossRefGoogle Scholar
  23. Hoene C (2004) Fiscal structure and the post-Proposition 13 fiscal regime in California cities. Public Budg Finance 24(4):51–72CrossRefGoogle Scholar
  24. Hou Y (2003) What stabilizes state general fund expenditures in downturn years—budget stabilization fund or general fund unreserved undesignated balance? Public Budg Finance 23(3):64–91CrossRefGoogle Scholar
  25. Hou Y (2004) Budget stabilization fund: structural features of the enabling legislation and balance levels. Public Budg Finance 24(3):38–64CrossRefGoogle Scholar
  26. Hou Y (2005) Fiscal reserves and state own-source expenditure in the downturn years. Public Finance Rev 33(1):117–144CrossRefGoogle Scholar
  27. Johnson CL, Kriz KA (2005) Fiscal institutions, credit ratings and borrowing costs. Public Budg Finance 25(1):84–103CrossRefGoogle Scholar
  28. Kioko SN, Martell CR (2012) Impact of state-level tax and expenditure limits (TELs) on government revenues and aid to local governments. Public Finance Rev 40(6):736–766CrossRefGoogle Scholar
  29. Kioko SN, Zhang P (2014) Impact of tax and expenditure limits (TELS) on local government debt burdens. Association of Budgeting and Financial Management, Grand RapidsGoogle Scholar
  30. Knight B (2000) Supermajority voting requirements for tax increases: evidence from the states. J Public Econ 76:41–67CrossRefGoogle Scholar
  31. Lobao L, Kraybill DS (2005) The emerging roles of county governments in metropolitan and nonmetropolitan areas: findings from a national survey. Econ Dev Q 19(3):245–259CrossRefGoogle Scholar
  32. Maher CS, Deller SC (2013) Measuring the impact of TELs on municipal financial condition. In: Levine H, Justice JB, Scorsone EA (eds) Handbook of local government fiscal health. Jones and Bartlett Learning, BurlingtonGoogle Scholar
  33. Marlowe J (2005) Fiscal slack and counter-cyclical expenditure stabilization: a first look at the local level. Public Budg Finance 25(3):48–75CrossRefGoogle Scholar
  34. Marlowe J (2011) Beyond 5 percent: optimal municipal slack resources and credit ratings. Public Budg Finance 31(4):93–108CrossRefGoogle Scholar
  35. Marlowe J (2013) Fiscal slack, reserves, and rainy day funds. In: Levine H, Justice JB, Scorsone EA (eds) Handbook of local government fiscal health. Jones & Bartlett Learning, Burlington, pp 321–341Google Scholar
  36. McCubbins MD, Moule E (2010) Making mountains of debt out of molehills: the pro-cyclical implications of tax and expenditure limitations. Natl Tax J 63(3):603–622CrossRefGoogle Scholar
  37. Moody’s (2004) The six critical components of strong municipal management. Moody’s Investors Service, New YorkGoogle Scholar
  38. Moody’s (2014) Rating methodology: US local government general obligation debt. Moody’s Investor Services, New YorkGoogle Scholar
  39. Mullins DR, Joyce PG (1996) Tax and expenditure limitations and state and local fiscal structure: an empirical assessment. Public Budg Finance 16(1):75–101CrossRefGoogle Scholar
  40. Mullins DR, Wallin BA (2004) Tax and expenditure limitations: introduction and overview. Public Budg Finance 24(4):2–15CrossRefGoogle Scholar
  41. Murray MP (2006) Avoiding invalid instruments and coping with weak instruments. J Econ Perspect 20(4):111–132CrossRefGoogle Scholar
  42. Plummer E, Hutchison PD, Patton TK (2007) GASB No. 34’s governmental financial reporting model: evidence in information relevance. Account Rev 82(1):205–240CrossRefGoogle Scholar
  43. Poterba JM, Rueben KS (2001) Fiscal news, state budget rules, and tax-exempt bond yields. J Urban Econ 50:537–562CrossRefGoogle Scholar
  44. Pridgen AK, Wilder WM (2013) Relevance of GASB No. 34 to financial reporting by municipal governments. Account Horiz 27(2):175–204CrossRefGoogle Scholar
  45. Rose S, Smith DL (2012) Budget slack, institutions, and transparency. Public Adm Rev 72(2):187–195CrossRefGoogle Scholar
  46. Rubin I (1998) Class, tax, and power: municipal budgeting in the United States. Chatham House, ChathamCrossRefGoogle Scholar
  47. Rueben KS (1997) The effect of tax and expenditure limitations on state and local governments, economics. Massachusetts Institute of Technology, BostonGoogle Scholar
  48. S&P (2013) U.S. local governments general obligation ratings: methodology and assumptions. Standard and Poor’s Rating Services, New YorkGoogle Scholar
  49. Saxton GD, Hoene CW, Erie SP (2001) Fiscal constraints and the loss of home rule: the long term impacts of California’s post-Proposition 13 fiscal regime. Am Rev Public Adm 32(4):423–454CrossRefGoogle Scholar
  50. Shadbegian RJ (1999) The effect of tax and expenditure limitations on the revenue structure of local government, 1962–87. Natl Tax J 52(2):221–238Google Scholar
  51. Shelton M, Tyer C (2000) Local government reserve funds and fund balance. Munic Finance J 21(1):1–18Google Scholar
  52. Skidmore M (1999) Tax and expenditure limitations and the fiscal relationships between state and local governments. Public Choice 99(1):77–102CrossRefGoogle Scholar
  53. Sokolow AD (2000) The changing property tax in the west: state centralization of local finances. Public Budg Finance 20(1):85–104CrossRefGoogle Scholar
  54. Stewart LSM (2009) Examining factors that impact Mississippi counties’ unreserved fund balance during relative resource abundance and relative resource scarcity. Public Budg Finance 29(4):45–73CrossRefGoogle Scholar
  55. Stock JH, Yogo M (2005) Testing for Weak Instruments in Linear IV Regression. In Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg, edited by Donald W K Andrews and James H Stock. Cambridge, MA: Cambridge University PressGoogle Scholar
  56. Sun R (2012) Reevaluating the effect of tax and expenditure limitations: an instrumental variable approach. Public Finance Rev 42(1):92–116CrossRefGoogle Scholar
  57. Suyderhoud JP (1994) State-local revenue diversification, balance, and fiscal performance. Public Finance Rev 22(2):168–194CrossRefGoogle Scholar
  58. Thaiprasert N, Faulk D, Hicks MJ (2010) The economic effects of Indiana’s property tax rate limits. Center for Business and Economic Research, Ball State University, MuncieGoogle Scholar
  59. Thompson F, Green MT (2004) Vox populi? Oregon tax and expenditure limitation initiatives. Public Budg Finance 24(4):73–87CrossRefGoogle Scholar
  60. Wagner GA (2004) The bond market and fiscal institutions: have budget stabilization funds reduced borrowing costs? Natl Tax J 57(4):785–804Google Scholar
  61. Wagner GA, Elder EM (2005) The role of budget stabilization funds in smoothing government expenditures over the business cycle. Public Finance Rev 33(4):439–465CrossRefGoogle Scholar
  62. Wang W, Hou Y (2012) Do local governments save and spend across budget cycles? Evidence From North Carolina. Am Rev Public Adm 42(2):152–169CrossRefGoogle Scholar
  63. Waters MD (2003) Initiative and referendum almanac. Carolina Academic Press, DurhamGoogle Scholar
  64. Wildasin DE (2010) Intergovernmental transfers to local governments. In: Ingram GK, Hong Y-H (eds) Municipal revenues and land policies. Lincoln Institute of Land Policy, Cambridge, pp 47–76Google Scholar
  65. Wolkoff M (1987) An evaluation of municipal rainy day funds. Public Budg Finance 7(2):52–63CrossRefGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2015

Authors and Affiliations

  1. 1.Maxwell School of Syracuse UniversitySyracuseUSA

Personalised recommendations