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Spending within limits: Evidence from municipal fiscal restraints

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  • Leah Brooks
  • Yosh Halberstam
  • Justin Phillips

Abstract

This paper studies the role of a constitutional rule new to the literature: a limit placed by a city on its own ability to tax or spend. We find that such a limit exists in at least 1 in 8 cities, and that limits are not adopted in response to high levels of or variability in taxation. After limit adoption, municipal revenue growth declines by 16 to 22 percent. Our results suggest that institutional constraints may be effective when representative government falls short of the median voter ideal.

Suggested Citation

  • Leah Brooks & Yosh Halberstam & Justin Phillips, 2012. "Spending within limits: Evidence from municipal fiscal restraints," Finance and Economics Discussion Series 2012-52, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2012-52
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    References listed on IDEAS

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    1. Stephen Coate & Brian Knight, 2011. "Government Form and Public Spending: Theory and Evidence from US Municipalities," American Economic Journal: Economic Policy, American Economic Association, vol. 3(3), pages 82-112, August.
    2. Alberto Alesina & Reza Baqir & William Easterly, 1999. "Public Goods and Ethnic Divisions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1243-1284.
    3. Downes, Thomas A. & Dye, Richard F. & McGuire, Therese J., 1998. "Do Limits Matter? Evidence on the Effects of Tax Limitations on Student Performance," Journal of Urban Economics, Elsevier, vol. 43(3), pages 401-417, May.
    4. Downes, Thomas A. & Figlio, David N., 1999. "Do Tax and Expenditure Limits Provide a Free Lunch? Evidence on the Link Between Limits and Public Sector Service Quality," National Tax Journal, National Tax Association, vol. 52(n. 1), pages 113-28, March.
    5. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, September.
    6. James Alm & Mark Skidmore, 1999. "Why do Tax and Expenditure Limitations Pass in State Elections?," Public Finance Review, , vol. 27(5), pages 481-510, September.
    7. Fernando Ferreira & Joseph Gyourko, 2009. "Do Political Parties Matter? Evidence from U.S. Cities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 399-422.
    8. Downes, Thomas A. & Figlio, David N., 1999. "Do Tax and Expenditure Limits Provide a Free Lunch? Evidence on the Link Between Limits and Public Sector Service Quality," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(1), pages 113-128, March.
    9. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65(2), pages 135-135.
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    Cited by:

    1. Eliason, Paul & Lutz, Byron, 2018. "Can fiscal rules constrain the size of government? An analysis of the “crown jewel” of tax and expenditure limitations," Journal of Public Economics, Elsevier, vol. 166(C), pages 115-144.
    2. Stephen Coate, 2014. "Optimal Fiscal Limits," NBER Working Papers 20643, National Bureau of Economic Research, Inc.
    3. Mark Gradstein, 2017. "Self-Imposition Of Public Oversight," Working Papers 1711, Ben-Gurion University of the Negev, Department of Economics.
    4. Heinemann, Friedrich & Moessinger, Marc-Daniel & Yeter, Mustafa, 2018. "Do fiscal rules constrain fiscal policy? A meta-regression-analysis," European Journal of Political Economy, Elsevier, vol. 51(C), pages 69-92.
    5. Pengju Zhang, 2018. "The unintended impact of tax and expenditure limitations on the use of special districts: the politics of circumvention," Economics of Governance, Springer, vol. 19(1), pages 21-50, February.
    6. Mark Gradstein, 2018. "Self-imposition of public oversight," Public Choice, Springer, vol. 175(1), pages 95-109, April.
    7. Matthew Walshe, 2019. "Does Local Government Autonomy Promote Fiscal Sustainability? Lessons from Illinois," IMFG Papers 42, University of Toronto, Institute on Municipal Finance and Governance.
    8. Daniel Shoag & Cody Tuttle & Stan Veuger, 2019. "Rules Versus Home Rule—Local Government Responses to Negative Revenue Shocks," National Tax Journal, National Tax Association;National Tax Journal, vol. 72(3), pages 543-574, September.
    9. Gradstein, Mark & Kaganovich, Michael, 2019. "Legislative restraints in corporate bailout design," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 337-350.
    10. Coate, Stephen & Milton, Ross T., 2019. "Optimal fiscal limits with overrides," Journal of Public Economics, Elsevier, vol. 174(C), pages 76-92.

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