Examining the Impact of Tax and Expenditure Limitations on Financial Condition of Major American Cities

Tax and expenditure limitations (TELs) are recognized as a financial institution that restricts the fiscal policy choices made by government officials. However, the impact of state-imposed TELs on municipal financial condition lacks a conclusive stance in existing literature. This paper empirically investigates the impact of this institutional factor on municipal financial condition, measured by cash, budget, and long-term solvency indicators. Analyzing the government-wide financial data from major American cities between fiscal years 2007 and 2016, the panel two-ways fixed-effects regressions and dynamic panel generalized method of moments estimations reveal a negative and statistically significant relationship between TELs stringency and indicators of municipal long-term solvency.