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The general equilibrium of tax and expenditure limits

  • Author(s): Moule, Ellen Concetta
  • et al.
Abstract

This dissertation analyzes the effectiveness of tax and expenditure limits. I contend that these limits are frequently implemented unfaithfully. Further, the politics of circumvention used to evade these limits causes unintended secondary and tertiary effects. To understand the policy implementation process, I apply principal-agent theory. The first chapter of my dissertation analyzes the effectiveness of tax and expenditure limits empirically. I pay close attention to pitfalls of time-series, cross- sectional data. Specifically, I account for violations of Guass-Markov caused by serial correlation or heteroskedasticity. I employ flexible TEL indicators to test for temporary and heterogeneous effects of the limits. In the second chapter I leverage two conditions previously shown to produce successful delegation to agents from the principal-agent literature. I apply each condition to the case of tax and expenditure limits and test whether or not limits are more effective when these conditions are met. My results show that tax and expenditure limits are more successfully when implemented by agents that share ideological convictions for cutting the size of government. I also present suggestive evidence that making limits easier to monitor makes them more effective. My third chapter focuses on the secondary and tertiary consequences of tax and expenditure limits. Specifically, I present evidence that property tax limits have detrimental effects on state and local revenues during recessions. Property tax limits cause states to rely on income-elastic revenue sources which cause greater revenue declines during economic downturns. Finally, my fourth chapter is a case study of Massachusetts' 1980 Property Tax Limit, Proposition 2 1/2. This initiative limits municipal property taxes to growth by 2.5% per year. In this chapter I look at the formula used to calculate the limit, highlighting how changes to this formula over time have made the limit less effective. I also analyze the extent to which revenue substitution, such as increases in state aid and charges and the extent to which revenue substitution, such as increases in state aid and charges and fees, can be attributed to the property tax limit

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