The Effects of Tax and Expenditure Limitations (Tels) on Municipal Fiscal Outcomes during A Period of Fiscal Distress

Abstract

We propose to expand the theoretical understanding of cutback strategies by investigating the effects of institutional constraints on fiscal outcomes during a period of severe fiscal distress. To test our research hypothesis, this study focuses on a cross-section of municipalities throughout the U.S. during and shortly after the 2008–09 recession. Using multiple data sources from the Government Finance Officers Association (GFOA) and American Community Survey (ACS), we employ a panel data from 2008 to 2011 which covers the period of the Great Recession to best capture cutback strategies during a period of severe fiscal distress. We observed differences in fiscal outcomes based on the severity of the municipal TELs. Municipalities constrained by more stringent TELs received more intergovernmental aid, incurred higher debt service expenditures and experienced less net capital investment during the most recent recessionary period. These findings support the argument that TELs, which are often neglected in discussions of cutback strategies, should be given greater consideration. This study helps shed light on the theoretical and empirical investigations of cutback strategies by offering the concept of institutional constraints and its impact on cutback strategies.