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Hou study on the impact of tax and expenditure limitations published in Publius

Jul 17, 2019

Yilin Hou headshot

Yilin Hou

American local government financing shifted from taxation toward user fees and charges (UFCs) in the late 1970s, with substantial efficiency and equity implications. Normatively, the shift aligns with the benefit principle; positively, the shift is often attributed to tax revolts.

The authors test the two associations via a difference-in-differences design and a fiscal stringency measure of tax and expenditure limitations (TELs); they also test the moderating effects of overrides on TELs. The authors' results confirm that state-imposed TELs caused the shift in local public finance; the results are robust to change of sample and empirical strategy. This article helps explain the relationship between tax revolts and non-tax revenue and provides evidence that fiscal constraints imposed by a higher level government on a constituent level can have significant effects, including effects beyond the intent of the constraints’ framers.