A few quick notes on Tax and Expenditure Limits (TELs)

Posted on April 22, 2010



Below are some clips from abstracts of empirical research studies on the relationship between tax limits and school quality. I address this topic because of current policy discussions in New Jersey regarding a Massachusetts-style Prop 2 1/2 limit to local property taxes (and state expenditures). Perhaps the most notable examples of the effects of TELs are in Colorado (under their TABOR) and California (Prop 13). But, TEL’s have been implemented in a number of forms across states.

This list of research findings is only a start, but illustrates an important point that choosing to limit taxes and expenditures likely means choosing to reduce service quality – increase class sizes and reduce teacher quality in particular. Again, that’s a choice. But we should be well aware of the consequences of these choices.

Other literature also suggests that while TELs reduce service quality by constraining state and local budgets, those service quality reductions are not necessarily accompanied by increased economic growth. This may be because regional economic growth is as related to regional service quality as it is to regional tax environment.

In any case, here’s a sampling of a) literature that links directly tax limits and school quality factors, b) literature on perceptions of Prop 2 1/2 in Massachusetts and finally, c) some bullet points from a non-peer reviewed report on Prop 2 1/2 from the Center for Budget and Policy Priorities (often characterized as “left-leaning”). Note that the first several articles here are from highly respected peer reviewed academic journals – Journal of Public Economics, National Tax Journal.

David N. Figlio

SHORT-TERM EFFECTS OF A 1990S-ERA PROPERTY TAX LIMIT: PANEL EVIDENCE ON OREGON’S MEASURE 5

National Tax Journal  Vol 51 no. 1 (March 1998) pp. 55-70

I use a comprehensive panel of school districts from Oregon and Washington, with annual data from before and after Oregon imposed its limitation in 1990. Controlling for unobserved heterogeneity, I find that Oregon student-teacher ratios have increased significantly as a result of the state’s tax limitation.

David M. Cutlera ,*, Douglas W. Elmendorfb, Richard Zeckhauserc

Restraining the Leviathan: property tax limitation in Massachusetts

Journal of Public Economics 71 (1999) 313–334

Proposition 2 ½, a ballot initiative passed in Massachusetts in 1980, sharply reduced local property taxes. We examine why voters supported Proposition 2 ½, using data on votes for the Proposition and for overrides of it a decade later. We find two reasons for the Proposition’s support: people perceived agency losses from the difficulty of monitoring government, and people judged government to be inefficient because their tax burden was high. By the 1990s, people either regretted the severity of the Proposition’s constraints or felt that its mission was accomplished.

David N. Figlioa and Kim S. Rueben

Tax limits and the qualifications of new teachers

Journal of Public Economics Volume 80, Issue 1, April 2001, Pages 49-71

This paper examines the impact of local tax limits on new teacher quality. Using data from the National Center for Education Statistics we find that tax limits systematically reduce the average quality of education majors, as well as new public school teachers in states that have passed these limits. The average relative test scores of education majors in tax limit states declined by ten percent as compared to the relative test scores of education majors in states that did not pass limits. This relationship is strengthened if we control for school finance equalization reforms or examine tax limits passed in two different periods.

Downes and Figlio working paper:

http://ase.tufts.edu/econ/papers/9805.pdf

In this paper, we find compelling evidence that the imposition of tax or expenditure limits on local governments in a state results in a significant reduction in mean student performance on standardized tests of mathematics skills.

Phil Oliff and Iris J. Lav

HIDDEN CONSEQUENCES: LESSONS FROM MASSACHUSETTS FOR STATES CONSIDERING A PROPERTY TAX CAP

http://www.cbpp.org/archiveSite/5-21-08sfp.pdf

  • A tax cap won’t make government services cost less. A cap does not prevent employee health insurance costs, special education costs, or other costs beyond localities’ control from rising much faster than the cap allows. Nor does it hold down the cost of heating buildings, buying gas for police and fire vehicles, and operating schools buses when the world price of oil is skyrocketing. When these things occur, as they have in Massachusetts, other services have to be cut to fit total expenditures under the cap.
  • Claims that caps will produce large savings through “efficiencies” are overblown. There are fewer efficiencies to realize from squeezing down revenues than cap proponents generally suggest. One person’s “efficiency savings,” such as the elimination of a police or fire station, may represent the loss of a critical service for another person. Ultimately, a property tax cap is highly likely to lead to reductions in basic community services and a deterioration in the quality of life in many communities — particularly in communities that cannot routinely override it.
  • Tax caps can be particularly harmful if adopted during a weak economy. Proposition 2½ took effect during a period of extraordinary economic growth — the “Massachusetts Miracle.” State revenues were rising, which allowed the state to boost aid to compensate for constrained property taxes, and construction was expanding, which allowed communities to raise their property tax revenue by more than 2.5 percent per year. If a state were to adopt a property tax cap during an economic slowdown or a period of weak state revenue growth, a major sustained infusion of state aid would not be possible and property tax revenue growth would be more constrained. As a result, schools and other services dependent on the property tax would have to be cut much more severely than in Massachusetts.
  • State aid can’t be relied upon to fill the gap. Even when state policymakers fully intend to expand state aid to fill local funding gaps created by a cap, a recession or fiscal crisis will usually derail this plan. State aid to localities in Massachusetts has fluctuated greatly with the business cycle and with state policy decisions. In any other state that might implement a cap, local government and school budgets are likely to become more volatile.
  • Changes in school enrollment can have a big impact. The adoption of Proposition 2 ½ coincided with a decline in Massachusetts’ K-12 enrollment, allowing schools to operate with less revenue. If another state adopted a property tax cap during a period of steady or rising enrollment, it would be forced to impose much more extensive cutbacks in teachers, classes, and programs than those seen in Massachusetts.
  • Without effectively targeted state aid, low-income communities will fall even further behind. Massachusetts has a highly targeted system of aiding local governments. The influx of state aid seems to have shielded low-income communities somewhat from Proposition 2 ½’s tendency to exacerbate differences in services between high- and low-income communities. But when state aid has receded as a result of economic downturns or state policy decisions, the poorest communities have had to make the largest budget cuts. In states that do not have a system of school aid that is targeted as effectively as Massachusetts’, students in low-income communities are likely to fall increasingly behind students in schools that have greater resources.
  • Wealthier communities will override a tax cap more frequently than poorer ones. This has contributed to a growing spending gap between local governments in high-income communities and all other communities, despite Massachusetts’ progressive system of state aid. This is likely to occur in other states that implement a cap.
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