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Can Fiscal Rules Constrain the Size of Government? (Eliason, Lutz)

Can Fiscal Rules Constrain the Size of Government? An Analysis of the “Crown Jewel” of Tax and Expenditure Limitations by Paul Eliason, Byron Lutz (10/2015).

Fiscal rules attempt to alter budget outcomes by constraining policy makers. They have been one of the primary responses to the recent spat of fiscal policy failures around the globe – e.g. Greece, Puerto Rico and Detroit. It is unclear, though, whether these rules cause a change in budget outcomes, are evaded by policy makers, or merely ratify the existing preferences of a jurisdiction’s voters and officials. We ask if fiscal rules are capable of altering budget outcomes by examining what is arguably the most stringent set of fiscal rules in the U.S.—Colorado’s Taxpayer Bill of Rights (TABOR). TABOR applies to all sub-national levels of government in Colorado, sets tight caps on essentially all forms of government revenue and in theory has almost no escape clauses which would allow officials to violate the caps. Previous examinations of TABOR have universally come to the conclusion that it significantly reduced both taxation and spending – i.e. that it caused a reduction in the size of government. To evaluate TABOR, we explore several ways in which the synthetic control methodology of Abadie et al. (2010) can accommodate multiple outcome variables (taxes and expenditures). We settle upon a preferred approach which allows for estimating multiple treatment effects simultaneously. Our results suggest that TABOR had no effect on the level of taxes or spending in Colorado and provide no support for the contention that fiscal rules alter budget outcomes. Instead, TABOR appears to have been partly evaded by policy makers and voters despite its stringency and partly nothing more than a ratification of the state’s preference over the size of its public sector.

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