NCPA - National Center for Policy Analysis

Effectiveness of State Tax and Spending Limits

January 29, 2002

Voters in a number of states have passed initiatives limiting taxing and spending, and legislatures have occasionally imposed tax and expenditure limitations (TELs) on themselves. How effective have these measures been in limiting government?

Although 26 states currently operate under some sort of TEL, researcher Michael J. New says it is important to examine them by type. For instance, tax and spending limits passed by initiative are more restrictive and contain fewer loopholes than those enacted by state legislatures. And while some of the TELs enacted by citizen initiative limit government spending to the inflation rate plus population growth, none of those enacted by state law does so.

  • In fact, according to New, other things being equal, state and local expenditures will decrease by $16.29 per capita every year after a state has passed a TEL by citizen initiative.
  • But TELs enacted by state legislatures will actually cause per capita expenditures to increase by $14.00.
  • TELs that limit expenditures to the inflation rate plus population growth reduce per capita state and local direct general expenditures by approximately $114.84.
  • Even if the limits on tax revenues and expenditures are looser -- say tied to the increase in personal income in the state -- New finds that if the TEL requires an immediate refund or rebate of surpluses, it will reduce per capita direct general expenditures by $39.80 annually compared to what it otherwise would be.

New says state legislatures generally lack incentives to constrain their own behavior. Thus TELs passed by citizen initiatives are far more likely to contain the sorts of provisions that are going to place effective limits on state spending.

Source: Michael J. New, "Limiting Government through Direct Democracy: The Case of State Tax and Expenditure Limitations," Cato Policy Analysis No. 420, December 13, 2001, Cato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001, (202) 842-0200 .

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