Benjamin Zycher at AEI has a new paper out that looks at the effectiveness of tax and expenditure limits (TELs) at promoting fiscal discipline in state and local governments. He finds that they are . . . not effective. 

The empirical analysis reported here applies data from 49 states (excluding Alaska) over the period 1970-2010 to the empirical question of the effectiveness of TELs, which across the states display a wide variety of features. The ineffectiveness of TELs is unambiguous in terms of summary statistics, case-study examination of the records of several individual states, and estimation of an econometric model. This model was estimated for both state and local spending combined and state outlays considered alone. The econometric model estimated here differs from those in the earlier literature, most importantly in that the existence of a TEL in a given state is treated here as a decision variable. The finding of ineffectiveness is broadly consistent with the findings reported in the earlier peer-reviewed literature.

This finding is interesting in and of itself, since there still seems to be a relatively widespread belief among free-market advocates that TELs (any TELs) can limit the growth of government. But there is another reason why Zycher’s paper is worth reading: its insight into public-choice economics. He writes:

The almost-universal weakness of TELs is striking, but the empirical evidence by itself does not explain these findings. In part, it is likely that the limits themselves are the products of the same political pressures and election dynamics that yield fiscal outcomes. Moreover, the competition among political interests that results in budget outcomes also is likely to weaken or circumvent limits that otherwise would be effective. This raises a larger overall question: what are the sources of government growth? Five hypotheses are discussed in this study, the upshot of which is that TELs by themselves are unlikely to affect the demand for or the cost of government spending.

The five main reasons Zycher outlines behind the growth of government:

•  Policies to provide collective goods and to address externalities
• The redistribution of wealth
• The demands of interest groups
• The bureaucracy as an interest group
• Decreases in the cost of collecting taxes

The bottom line is that TELs don’t have an impact on the growth of government mostly because the factors that lead to bigger government remain unchanged. 

Zycher concludes:

In short, a TEL is unlikely by itself to reverse the underlying conditions that yield expanding government. In particular, the incentives of interest groups to circumvent and neutralize the effects of TELs are unsurprising; that may be one central lesson from the California and Washington experiences. Future efforts to restrain the growth in government spending may find greater success if they are directed at increasing competition among bureaus. One obvious way to achieve this is to strengthen the institutions of federalism, thus forcing states and localities to compete with each other. Another might be to allow bureaus to compete for budget dollars in the provision of given services. An expanded effort to privatize the provision of government services in a competitive market might serve to improve productivity and reduce costs. More generally, it is likely to be the case that such mechanical tools as TELs will be unable to substitute for the hard work of long-term public education and persuasion about the central benefits of reduced government spending. At a fundamental level, in the long run under democratic institutions, popular will is likely to impose sharp constraints on the behavior of government; this means that attitudes must be changed through a process of debate and enlightenment.

I agree with his solutions: competition, federalism, and educating the public about the benefits of a small government. Read the whole paper here.

My colleague Matt Mitchell had a paper on this subject a few years ago. Mitchell’s paper measures the impact of TELs in a different way than Zycher, so their results aren’t exactly comparable, but it is worth mentioning here. Mitchell found that the way TELs are designed matters. Unfortunately, the majority of TELs are designed in a way that leads to more spending in high-income states. He does find that some TELs work better than others, but they’re exceptions rather than the rule. We should never be surprised that state officials and lawmakers refuse to pass laws that would actually tie their hands.