The Restrictiveness of State Tax and Expenditure Limitations and State Debt

Using a panel data set of the 50 states from 1969 to 2005 we explore the impact of the restrictiveness of tax and expenditures limitation (TELs) on state debt. Using six characterizations of tax and expenditure limitations we build three unique indices of restrictiveness: one index for expenditure focused TELs, one for revenue focused TELs and one for TELs that limit both revenues and expenditures. We test whether the restrictiveness of TELs is associated with increased use of debt. Using two-way fixed and random effects estimators we find that more restrictive TELS on either expenditures or revenues are associated with higher levels of debt, as expected. States with more restrictive TELs that cover both revenues and expenditures have lower levels of debt.