Tax and Expenditure Limits Are Ineffective

May 20, 2013

In an attempt to rein in their finances, 30 states have enacted limitations on taxes, budgets or outlays since 1978. Tax and expenditure limits (TELs) take different forms and have grown in popularity with politicians and citizens quick to applaud fiscal restraint. Close analysis of the data on TELs, however, reveals that the tax caps are not effective, says Benjamin Zycher, a visiting scholar at the American Enterprise Institute.

  • The new study examines data from 49 states over the period of 1970 to 2010 to determine if TELs are effective.
  • Over the time period, state and local outlays as a proportion of gross domestic product fell from 16.8 percent to 15.5 percent.

After examining the data, the study shows that TELs have little effect on state and local outlays.

  • Regardless of whether a TEL is implemented, there is an underlying political demand for services from the government that will drive government growth.
  • The study finds that tax rates or the distribution of the tax burden is determined separately from any limits imposed on tax expenditures.

If TELs cannot reduce the demand for government, influence productivity or improve the information about bureau costs available to the legislature, then a TEL is unlikely to reverse the conditions that yield expanding government.

  • Because special interests and lobbyists are so effective in our political system, exceptions to workarounds are often made to the TELs.
  • One way to reduce spending is to encourage competition between bureaus.
  • Increasing federalism, the division between federal and state government, would also force localities to compete for the same money, thereby increasing efficiency.

Source: Benjamin Zycher, "State and Local Spending: Do Tax and Expenditure Limits Work?" American Enterprise Institute, May 2013.

 

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