The effect of tax and expenditure limitation measures on tax reform efforts in the States

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The effect of tax and expenditure limitation measures on tax reform efforts in the States
Resnick, Phyllis A
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xvii, 208 leaves : ; 28 cm


Subjects / Keywords:
Taxation -- States -- United States ( lcsh )
Fiscal policy -- United States ( lcsh )
Tax and expenditure limitations -- United States ( lcsh )
Fiscal policy ( fast )
Tax and expenditure limitations ( fast )
Taxation -- U.S. states ( fast )
United States ( fast )
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )


Includes bibliographical references (leaves 198-208).
General Note:
School of Public Affairs
Statement of Responsibility:
by Phyllis A. Resnick.

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|University of Colorado Denver
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LD1193.P86 2008d R47 ( lcc )

Full Text
Phyllis A. Resnick
B.B.A. University of Michigan, Ann Arbor, 1987
M.A. University of Colorado, Boulder, 1993
A thesis submitted to the
University of Colorado, Denver
in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
Public Administration

by Phyllis A. Resnick
All rights reserved.

This thesis for the Doctor of Philosophy
degree by
Phyllis A. Resnick
has been approved
Linda deLeon
Christine Martell
Daphne Greenwood
U ftl(v4

Resnick, Phyllis A. (Ph.D., Public Administration)
The Effect of Tax and Expenditure Limitation Measures on Tax Reform Efforts in
the States
Thesis directed by Professor Peter deLeon
This dissertation examines an unintended consequence of tax and expenditure
limitation (TEL) measures. That is, do such measures impede tax reform efforts
in the states? While TELs are intended to limit the growth in government, they
are not intended to leave states with immutable tax codes. TELs have been
determined to have myriad other unintended consequences. This is one that has
yet to be studied.
This research is framed in the framework of public choice economics that argues
that TELs, as a policy instrument, are an appropriate response to public officials
theorized to maximize the amount of revenue and size of the budget under their
control. In this construct, TELs, by limiting the size and growth of government as
well as the flexibility of officials to control revenue levels, are the counterbalance
to the revenue maximizing official. However, this dissertation hypothesizes that

these limitations, through their impacts to flexibility, also limit the ability for such
officials to enact comprehensive tax reform. And, it hypothesizes that the stricter
the limit, the greater the impediment.
The analysis was completed with a series of panel data regressions exploring the
relationship between TELs and tax reform for the 50 states over the period 1992-
2002. The dependent variable, tax reform, was defined as discrete tax changes.
In recognition that TELs may asymmetrically affect tax reform, the regressions
alternatively explored the effect on total tax changes, increases and decreases.
The TEL variable was coded to test separately the effect of both the existence and
restrictiveness of TELs.
The results indicated that the existence of TELs impeded tax reform. The longer
the TEL has been in existence, the more reform is impeded. However, in a
surprising finding, the restrictiveness of the TEL was not found to be a significant
impediment to reform. Weak and strong TELs alike impede tax changes. It
appears impossible to construct a TEL to provide the protection citizens require
yet allow for the flexibility for elected officials to easily enact necessary tax

This abstract accurately represents the content of the candidates thesis. I
recommend its publication.
Peter deLeon

This project has been a long time coming. Naturally, with all that time, I should
have this, the acknowledgement, very well thought out. It is, after all, perhaps the
most enjoyable leg of this journey. However, I am finding the opposite. I can
easily identify those I want to thank and how much I appreciate all of their
support, but I am finding the words simply hard to come by. Nevertheless, in
what follows, I will try my best to convey my appreciation for that support, and
yes, Ill be honest, the persistence.
The journey to the completion of this dissertation began with an invitation from
Peter to return to the graduate program at GSPA. Without that personal
invitation, I doubt I would have returned. Thank you, Peter. And, more
importantly, thank you for guiding my graduate studies, believing that I would
complete this project even at times when you probably should not have, and most
importantly being both a professional colleague and a friend. I have asked more
of you as a chair than I probably was entitled to, but I recognize and will forever
appreciate the commitment you made to helping me see this become a reality.

The beautiful thing about having a dissertation committee is that each member,
often unbeknownst to each, contributes a moment that serves as inspiration.
While there are many thanks that go out to my committee, I will forego the full
list and share with each of you the moment that has served as that inspiration for
me. Thank you Linda for the moment when, at my colloquium, you said that
finally digging into the analysis of empirical, data-driven dissertations was the fun
part. I kept those words in my head as I waded through multiple iterations of
panel data regressions. Thank you Christine for the moment on top of a mountain
outside Boulder when the half thought out idea I had for this dissertation finally
took shape. You may not even remember that hike, but I will forever remember it
as the day when I first began to believe that this idea might actually have merit.
Thank you Daphne for the moment around your dining room table when we
began to talk about the specification of the regression equations. Up until that
day, I was not sure how to operationalize this analysis. I hope you see your
insights appropriately reflected in the final product. And, thank you Mark for the
many moments we spent chatting at the Center for Tax Policy Board meetings
about the unintended consequences of TABOR. You may not know it, but this
whole idea sprang from those conversations.

Encouragement and support in the completion of a dissertation comes in many
forms and from many people and organizations separate from ones dissertation
committee. First of all, thank you to the Lincoln Institute of Land Policy for
financial support of this dissertation project.
Antoinette and Dawn, thank you for helping me navigate what was admittedly a
quite nontraditional path through years at GSPA. Your guidance through my
comings and goings from the program and the University saved me uncounted
hours. You are an invaluable aid to those of us lost in the morass of deadlines and
requirements. And, most importantly, I always knew that no matter how crazy it
felt I could always count on both of you to share a smile.
Kathy, I am a believer. Scheduling does matter. You can schedule for me
anytime. Thank you for the evening you spent with me in front of a spreadsheet
and a calendar, mapping out the final path to completion of this dissertation. It
worked. Most friends would not make such a commitment to anothers project. I
am lucky you are my friend.
Mark, thank you for supporting my return to graduate school, even when our
marriage was very young. I will forever remember the conversation on the beach

in Greece when you encouraged me to pursue this dream. Your selfless
encouragement and support in those early years are a gift I will always treasure.
Lainie, many people have sisters and most have friends. I am lucky that you are
both. Thank you for the countless hours of conversation and sharing, both about
this project and otherwise. In all ways, intellectual and personal, I am enriched by
our relationship and I dont say thank you enough. This is a wonderful
opportunity to do so.
Dad, I know that supporting my education throughout the years was a sacrifice
that you and mom made willingly. Thank you for that commitment to my earlier
education. Without that, today would not be possible. I consider it the greatest
gift a parent can give to a daughter, and 1 am lucky to have parents who not only
supported, but also encouraged education.
Finally, Id be remiss not to remember and thank my mother, whose lifelong
commitment to education was probably instilled in me long before I even
consciously recognized it. Had she not called me in Jerusalem to encourage me to
return home and accept the offer to begin graduate studies, I might never be
celebrating this accomplishment. Mom, I will keep you with me on May 17 just

as you were for all of my previous graduations from pre-school through my MA.
I miss you.
Thank you to everyone. While I pounded the keys, this project was not completed

LIST OF FIGURES....................................................................xvi
LIST OF TABLES....................................................................xvii
1. INTRODUCTION..............................................................................1
A Colorado Illustration..............................................................4
Dissertation Overview................................................................9
2. THE HISTORY OF THE TAX REVOLT............................................................10
The Revolt Against British Taxation: 1764-1776......................................12
The Revolt Against Federalist Taxes: 1791-1799......................................16
Whiskey Rebellion of 1794, Fries Rebellion of 1798..................................20
Revolt Against the Tariff and the Civil War: 1828-1861..............................22
A New Direction: Progressive and Depression.........................................25
Era Revolts 1900-1935 ..............................................................25
From Focus on the Federal Government to Focus on....................................26
State and Local Governments.........................................................26
From a Victim Mentality to an Owner Mentality.......................................28
From Localized Violence to Political Organization...................................30
From Revolts Against Specific Taxes to a Movement...................................33
to Limit the Scope of Government....................................................33
From Amateurs to Professionals......................................................35
Recap: From Rebellion to Movement...................................................36
The Modem Tax Revolt, Fiscal Cap TELs, and TABOR....................................37
Propositions 13 andl'A.......................................................38

Prop 1, Headlee, and the Modem TEL Movement.....................................43
Why do TELs Pass?......................................................................46
Characteristics of Fiscal Cap TEL States...............................................48
The Modem Tax Revolt Take Two: The TABOR Movement......................................53
3. REVIEW OF THE LITERATURE....................................................................55
Public Choice Theory: Leviathan Government.............................................56
TELs and Their Intended Consequences: Do TELs Limit Government?........................65
TELs: The Unintended Consequences......................................................80
TELs and Education..............................................................81
TELs and the Shifting of Funding Responsibility.................................82
Conclusion: TELs and Their Consequences................................................83
4. RESEARCH DESIGN AND ANALYTIC METHODS........................................................85
Research Design........................................................................87
Hypotheses and Associated Dependent Variable Specification.............................88
Tax Reform as the Dependent Variable: A Closer Look....................................93
Source of Tax Reform Data.......................................................94
Operationalizing the NCSL Data..................................................96
Period of Study........................................................................98
The Vector of Independent Variables...................................................101
Policy Variables- The TEL Variables...................................................102
Taxonomy of Fiscal Cap TELs...........................................................105
From Taxonomy to a Measure of Restrictiveness.........................................111
Control Variables.....................................................................114
The Variables: A Recap................................................................118

Analytic Methods............................................................................121
Descriptive Statistics Bivariate Analysis.................................................121
Limitations of the Bivariate Specification..................................................122
A Multivariate Inferential Model Panel Data Econometrics.................................123
Estimating the Random Effects Model in STATA...............................................128
Threats to Reliability and Validity.........................................................132
Measuring Instruments: Reliability and Operational Validity..........................132
Validity of the Research Findings....................................................134
5. RESARCH FINDINGS.................................................................................138
Descriptive Statistics and Bivariate Analysis:..............................................139
A Closer Look at TEL States.................................................................139
and Tax Changes.............................................................................139
What About Variability?.....................................................................142
Limits of Bivariate Analysis................................................................145
Examining the Relationship Between TELs and Tax Reform:.....................................146
A Multivariate, Inferential Approach........................................................146
The Regression Findings: Hypothesis One.....................................................150
Hypothesis One, Case One: Total Tax Changes..........................................151
Hypothesis One, Case Two: Total Tax Increases........................................155
Hypothesis One, Case Three: Total Tax Decreases......................................158
The Existence ofTELs and Tax Reform: A Recap of Hypothesis One Findings.....................161

The Regression Findings: Hypothesis Two
Hypothesis Two: The Combined Findings.................................164
Limitations of the Panel Regression Model...................................169
6. CONCLUDING THOUGHTS.............................................................173
Key Findings................................................................175
What More May be Learned of TELs and Tax Reform?............................180
To Conclude.................................................................186
APPENDIX A: CHARACTERIZATION OF FISCAL CAP TELs.....................................187
APPENDIX B: DATA APPENDIX...........................................................193
WORKS CITED.........................................................................198

BILLIONS OF CHAINED 2000 DOLLARS..........................100
REVENUES, 1992-2000.......................................101
STATES, TEL STATES, AND NON-TEL STATES....................141
BY TYPE OF STATE..........................................143
CHANGE, 1992-2002

Table 1: Do TELs matter in limiting the growth of government?...........76
Table 2: Aspect of TELs, effect on tax reform, and corresponding dependent
Table 3: Aspect of TELs, effect on tax reform, and corresponding independent
and dependent variables................................................120
Table 4: Independent variables and their expected signs.................131
Table 5: Hypothesis one, case one regression results on total tax changes...152
Table 6: Hypothesis one, case two regression results on total tax increases.156
Table 7: Hypothesis one, case three regression results on total tax decreases ....159
Table 8: Hypothesis two, case one regression results on total tax changes...165
Table 9: Hypothesis two, case two regression results on total tax increases.166
Table 10: Hypothesis two, case three regression results on total tax decreases.. 167
Table 11: Summary of research findings by hypothesis........................171

Since the 1978 passage of Californias Proposition 13 initiated the modem tax
revolt, the fiscal constraint movement has coalesced around efforts to enact
comprehensive tax limitation measures in the states. These measures take a
variety of forms, and no two measures are identical. However, scholars generally
point to fiscal cap style tax and expenditure limitations (hereinafter referred to
simply as TELs)1 as the true legacy of the modem tax revolt (Cox and Lowery,
All fiscal cap style TELs share a common set of characteristics and differ from
singular limitations on specific taxes or other limitation measures such as
requirements that an extra majority of the legislature approve tax increases. While
most singular limitations such as Proposition 13 style property tax limits are
retrospective in nature, fiscal caps are forward looking. Fiscal caps take the
current levels of taxing and spending as a base and limit future growth revenues
1 To be correct and consistent with the literature on tax and expenditure limitations it is necessary
to recognize that any legal measure that results in a limitation on a governments ability to tax
and/or spend is appropriately classified as a TEL. This would include, for example, property tax
limits and supermajority requirements as well as fiscal cap style measures. However, since this
dissertation is concerned solely with the fiscal cap style measures, the acronym TEL will be used
to refer to fiscal cap style tax and expenditure limitations only.

and/or expenditures to a set metric (Wildavsky, 1980). And, while property tax
limitations such as Californias Proposition 13 effectively limit only the property
tax, most fiscal caps comprehensively limit all forms of revenue, thus imposing a
more comprehensive attack on the growth of the public sector.
In the immediate wake of the TEL movement, scholarly analysis was largely
concerned with whether TELs were achieving their intended consequences
(ACIR, 1977; Inman, 1979; Ladd, 1978; Bails, 1983; Shannon and Calkins, 1983;
Kenyon and Benker, 1984). That is, did TELs succeed in shrinking or limiting
the growth in government?
Although more than a decade after the passage of Proposition 13 academicians
and practitioners continued their explorations of the intended consequences of
TELs (Stansel, 1994; Howard, 1989; Cox and Lowery, 1990; Bails, 1990), the
richer scholarly works began to explore institutional capacity of government in
the wake of the modem tax revolt. Following the political economy perspective
set forth by Kirlin (1982), the pertinent questions became those of the impact of
TELs on outcomes in education (Downes and Figlio, 1999; Figlio and Rueben,
2001; Downes, Dye, and McGuire, 1998; Figlio, 1997; Shadbegian, 2003; and
Figlio, 1989), budgetary behavior (Reid, 1988; Galles and Sexton, 1998;

Skidmore, 1999; Shadbegian, 1999; Bennett and DiLorenzo, 1982),
intergovernmental relations (Mullins and Joyce, 1996), and public sector
employment (Poterba and Rueben, 1995). What links all of these works is their
consideration of the responses [that] define the capacity of political systems to
act in the future (Kirlin, 1982, 110). This dissertation explores another of those
capacity-altering responses by exploring the following research question: Does
the existence and structure of a TEL affect a states ability to and process of
enacting reform to its tax code?
Kirlin (1982, 5) sums up best why such policy considerations warrant merit.
...the overarching criterion by which any political system
must be judged is its sustained capacity to choose and act. If
that capacity is lost, the political system unravels and is
replaced; if that capacity decays, the choices made for society
are likely to be erroneous or so poorly implemented as to be
ineffective. The capacity of a political system should not be
measured by the percentage of the nations product that the
system directly controls, nor by the variety and extent of
activities it undertakes. Instead, political-system capacity
must be measured by the systems ability to learn and to adapt.
There is not much that is more fundamental to the capacity of a government than
its ability to amend its tax code to adapt to current and emerging economic
conditions. The maintenance of a stable and productive revenue system is a
necessary prerequisite for the institution for function effectively, and such

maintenance requires that governments have the ability to change the tax system
as economic conditions dictate. Yet, there is evidence from Colorados
experience and its futile attempts to reform the business personal property tax
(BPPT) that the states capacity to amend its tax code has been permanently
altered by its TEL. If, across the nation, TELs are demonstrated to impede a
states ability to amend its tax code, the future economic sustainability and thus
the overall sustainability of the institution of state and local government will be
called to question. Failure to learn and adapt a process for maintaining a
sufficient revenue stream will ultimately render state and local governments
incapable of carrying out their basic policy purposes.
A Colorado Illustration
Colorados BPPT is an ad valorem property tax assessed on business property not
attached permanently to real estate. BPPT liability accrues on business equipment
such as computers, machinery, and any other equipment employed in the course
of doing business. Unlike a residential taxpayer who pays property tax only on

the value of land and structures, businesses pay on land, structures, and personal
The BPPT is not unique to Colorado. In fact, for the majority of the 20th century,
the BPPT was a tax imposed by most states. However, late 20th century changes
to states economies reduced reliance on equipment-intensive manufacturing
activity in favor of services and intellectual type activities. As a result, the
remaining manufacturers, left paying the bulk of the BPPT, began to bear an
increasing property tax burden relative to their counterparts in less equipment
intensive sectors. In order to retain or even recruit primary manufacturing jobs to
ones state, legislatures began to greatly reduce or even repeal their BPPT,
rebalancing their revenue system away from the property tax and onto other taxes.
So common is BPPT reform that today only few states still heavily tax business
personal property. Colorado is one of them. Why then does Colorado not just
repeal or reform the BPPT? In a nutshell, Colorados web of constitutional
restrictions on taxes makes revenue neutral reform or repeal of the BPPT costly
and difficult, and local governments in Colorado are reliant on the proceeds for
2 Note that the term personal property is a bit of a misnomer. Business personal property is not
personal in any sense. It is simply the equipment employed by a business in the pursuit of its

the BPPT, rendering any reform that is not revenue neutral economically
In 1999, BPPT accounted for between 20% and 40% of total revenue for fourteen
counties; two counties, Moffat and Morgan, derived more than half of their
property tax revenues from the BPPT (Pilcher, 1999). For many units of local
government, particularly school districts, the revenue received from the BPPT is
far from trivial. A study based on year 2000 assessed values and reflecting the
Gallagher Amendments impact on Colorados property taxation, estimated that
the total cost to the state of a repeal of the BPPT would be $1.05 billion
(Greenwood and Brown, 2001). Colorado Counties Incorporated, the trade
association for the states counties, has taken the position is that if the state makes
a tax policy decision that adversely affects the personal property tax, a county
revenue source, the state should also take the financial responsibility to protect
those local governments from the revenue loss (Taylor, 1998). Regardless of
whether it is the state or the local government that replaces the revenue,
Colorados local governments and school districts could not continue their level 3
3 Currently residential property can amount to no more than approximately 47% of total valuations
under Gallagher. If business personal property were removed from the non-residential property
base, then the resulting proportion of total valuations attributable to residential property would
increase over the legal ceiling. The remedy for this under Gallagher is to further reduce the
assessment rate on residential property, reducing the share subject to the mill levy. The result
would be a decrease in property tax revenue from both residential and non-residential property.

of service without either the BPPT revenues or a replacement revenue stream.
However, replacing revenue streams is complicated by Colorados fiscal cap TEL
known as the Taxpayers Bill of Rights (TABOR) Amendment.
In 1992, Colorado voters passed TABOR. This far-reaching TEL imposed a
myriad of restrictions on all governments in Colorado from the smallest local
district up to the state government. There are many tenets to Colorados TABOR
Amendment, but the relevant restriction here is the requirement that all tax
increases4 be subject to a vote of the people in the affected jurisdiction. Any
revenue-neutral reform of the states BPPT requires replacement of lost revenue,
likely through an increase in another tax, an increase in county mill levies, or
through an increase in the assessment rate on commercial property from its
current level of 29%. In any case, popular approval from the voters would be
Colorado is in an interesting position. The web of restrictions written into the
states constitution have essentially precluded the states lawmakers from making
tax reforms, even when those reforms include the reduction or elimination of what
4 Tax increases are defined broadly in TABOR. Included in this restriction are not only tax rate
increases but also any policy changes that are expected to result in an increase in taxes. Thus an
increase in the assessment rate would be considered a tax increase under TABOR.

is generally considered to be an anticompetitive and counterproductive tax. In the
ironic contradiction of Colorados BPPT, limitations passed by the voters
intended to reign in the growth and reach of government have essentially
precluded that government from institutional reform that would reduce its reach.
Descriptive research suggests that Colorado is not the only state facing this
consequence of TELs. An analysis of the education budget in Oregon states that
[s]table, sustainable, and adequate funding for a quality K-12 school system
requires a new tax system yet... [v]oter approval of any major tax change is
highly unlikely unless its revenue neutral (Oregon Progress Forum, 1999).
This dissertation explores whether the relationships described in Colorado and
Oregon are endemic to TEL states overall, thus presenting us with Kirlins (1982,
5) concern for a political systems sustained capacity to choose and act. It
explores the relationship between existence of TELs and success at tax reform
efforts for all 50 states as well as the specific details of the relationship between
the structure of the TEL and tax reform for the 27 states operating under a fiscal
cap style TEL during the 1992-2002 study period.

Dissertation Overview
Following this introduction, this dissertation continues with an overview of the
history of the tax revolt in the United States. The tax revolt, theoretically begun
before the United States could even call itself such, has evolved over two
centuries into the TABOR movement currently underway in the states. Chapter 2
traces that chronology. Following the history chapter, Chapter 3 outlines the
relevant bodies of literature providing the theoretical and conceptual basis for this
research. Chapter 4 details the data and methods employed to explore the
relationship between both the existence and structure of TELs and state level tax
changes. Chapter 5 presents the detailed research findings and Chapter 6
concludes this dissertation with a discussion of the implications of these findings
and a glance forward at options for expanding and enriching this research.

A little rebellion, now and then, is a good thing Thomas Jefferson
No taxation without representation. With those four words and some tea that
symbolically ended up in Boston Harbor, the soon to be formed United States
continued on what would ultimately become a long tradition of tax revolt.
Although some argue that the pre-revolutionary war revolt that started in search of
representation has evolved into one that seeks to circumvent such representation
(Smith 1998), in some form tax revolt has consistently been a part of American
culture and tradition. Popular resistance to tax increases is strong within [our]
political culture (Pollack 1996, 21). Each subsequent incarnation of tax revolt
left behind its own mark on the political landscape of the county.
Although no taxonomy is perfectly correct, many authors find it convenient to
characterize the tax revolt according to era. Adams (1998) sets forth such a

taxonomy by categorizing the tax revolt into the following eras: British Taxation
(1764-1776), Federalist Taxes (1791-1799), Tariffs (1828-1861), Revenue
Raising and the Roots of the Internal Revenue Service (1865-1900), and Revolt
Against the Income Tax (beginning in 1913). The categorization set forth by
Adams (1998) frames the tax revolt as one largely against federal or national level
taxes. Most scholars would augment such a timeline with the salient periods of
state and local tax revolt, namely the Depression Era revolt largely against the
property tax (Beito, 1989) and the post Proposition 13 revolt that ultimately led to
the current movement to shrink government through fiscal cap style tax and
expenditure limitations (TELs) (Sexton, Sheffrin, and OSullivan 1999).
Sepp (1999) further dichotomizes the history of tax resistance that started in the
colonial period to differentiate between rebellions against specific taxes to a full
revolt against government that took popular form as a revolt against taxes; the
starve the beast strategy. From the Boston Tea Party to the Whisky Rebellion
to the repeal of Lincolns War Tax, American history is replete with tax
rebellions brought on by political and economic factors peculiar to those times.
But the Tax Revolt- the ongoing political movement for limited government is
a more recent phenomenon... (Sepp 1999, 2). Finally, Adams (1984) classifies
the American tax revolt into three waves. The first is the revolutionary period,

highly influenced by the works of John Locke. This was followed by the second
wave, with the tax revolt characterized by the Jacksonian era reforms calling
mainly for citizen consent for public borrowing and the taxation required to
service such debt. Adams third wave was largely a completion of what was
begun in the Jacksonian era, with the tax revolt merging with the Progressive Era
reforms, particularly the implementation of direct democracy. For Adams (1984),
the tax revolt seized on the Progressive Era reform granting the initiative, and
resulted in citizens using such right to constitutionally limit taxation at the state
level. By whatever characterization one chooses to employ, the United States has
an interesting history with tax revolts that has its roots in the colonial era and
continues to this day.
The Revolt Against British Taxation: 1764-1776
Even before the Boston Tea Party and the formation of the new nation, the
colonists established what would become an American tradition by rebelling
against British imposed taxes, most notably those contained in the Sugar Act of
1764, the Stamp Act of 1765, and the Townshend Act of 1767 (Smith 1998).
Although it is conventionally believed that the rebellions against taxes from the
Crown were rooted solely in the lack of representation, more careful examination

of the series of tax revolts against the British reveals multiple grievances (Adams
1998). In fact, by the time of the Revolutionary War, although representation had
coalesced as a major impetus for the rebellion, it was not the only one (Adams
The original British and Dutch immigration to North America was driven largely
by an attempt to achieve freedom from European taxes. So, it is not surprising
that the British colonial taxes, imposed upon the descendents of those original
settlers, resulted in revolt, one that began regionally with a whimper and
concluded with the colonies united in a furious rage against the British.
The first levies imposed by the British were import tariffs on non-British goods
and intended not primarily as a means of raising revenue but rather to protect
British goods. Surprisingly, for many years, the colonists did not oppose such
import tariffs. Even Benjamin Franklin, early on, did not oppose what he
considered external taxes or tariffs and publications from those times somewhat
perversely argued if taxes were low (for revenue) then they were illegal; but if
high (to prohibit trade), they were lawful (Adams 1984, 37). Much of this lack
of resistance began to erode; however, with the imposition of what were
considered internal taxes.

The first such imposition of a major internal tax by the British was the Sugar Act,
intended to finance Great Britains war with the French. The Sugar Act, a broad
based tax levied upon non-British goods, was met not with unified colonial
resistance but rather with regional opposition in the New England colonies. This
resistance, however, was sufficient to win the repeal of the Sugar Act in 1765, a
Faustian bargain for the colonies which, soon after, saw it replaced with the more
onerous Stamp Act. In an ironic twist, though, the Faustian bargain played both
ways, as it was the Stamp Act and its successor the Townshend Act that
ultimately unified the colonies against the British into the revolt that we now
know as the Revolutionary War.
It was not as much the substance of the Stamp Act, but rather the outcome of this
excise tax imposed on all written documents, that truly started the colonists down
the path to revolution. As Adams (1998) notes, the rebellion that ensued in
reaction to the Stamp Act united the colonies in opposition to the Crown, a
unification that up to that date had been largely unsuccessful. The physical
manifestation of this unity was the unanimous participation of the colonies in the
meeting of the General Congress out of which the principle of representation first
emerged (Adams, 1984). The document adopted at the General Congress, the

Declaration of Rights and Grievances, highlighted the issue of representation in
its main clause. .it is essential to the freedom of a people.. .that no taxes be
imposed on them but with their own consent, given personally, or by their
representatives (quoted in Adams, 1998, 35).
Ultimately the rebellion by the colonists was successful in winning the repeal of
the Stamp Act, but perhaps the path was charted. The replacement duties of the
Townshend Act, largely import taxes and thus the external taxes that the colonists
originally favored, were no longer accepted. Furthermore, the administration of
the Townshend Act, largely through the Board of Commissioners of Customs,
was viewed as onerous and arrogant, and as a final straw the quartering
requirements were met with resistance in New York. By 1767 and the imposition
of the Townshend Act, the Americans had coalesced around a consistent position
with regard to taxation.
The Townshend duties helped the colonists clarify their
thinking about taxation and consent. The Americans were not
to leave the door open again. Distinctions between internal
and external taxes were abandoned. ... The Americans finally
realized that any taxation without their consent was against
their disposition (Adams, 1998,41-42).

This anger toward the British imposition of taxes, both their substance and the
manner in which they were administered, ultimately came to a head with the
Boston Tea Party. Although it may be argued that the protest in Boston Harbor
was more about the trade practices of the British than about taxation (Adams,
1998), the general discontent that had been rumbling for years culminated with a
furor on that day. Then in a cascade of events begun with the heavy handed
British response to the dumping of the tea, the colonists found themselves
ultimately fighting and winning a war of independence against the British. The
rebellion over British taxation may have ended with the final battle of the
Revolutionary War; however, the tax revolt in the newly formed United States
was just beginning.
The Revolt Against Federalist Taxes: 1791-1799
The revolt against taxes did not end with the newly earned independence from
Britain; in fact, it just began. Saddled with war debt and the need to form an
effective system of governance for the newly independent colonies, one of the
major early debates engaged in by the leaders of the new nation was over the form
and scope of the inevitable revenue system that would need to be established.

And, in response to the system created, the new Congress found itself facing two
major tax revolts within the first decade it gained the power to tax.
Beginning in 1781, the young government was operating under the newly
approved Articles of Confederation. The Articles established only one branch of
government, the Congress, and leery of centralized taxes, the drafters of the
Articles did not grant the federal government the power to tax. Instead, the
federal government was forced to rely on the states for tax revenue (Gordon,
1996), and it took a supermajority of 9 of the 13 original states represented in the
Continental Congress to approve a requisition to the states (Adams, 1998). This
requirement made it impossible to centrally enact a tax, resulting in two major
outcomes. First, the nation and its individual states were increasingly drowning in
their war debts and urgently needed a means of repaying them. Second, economic
systems, including those of taxation and the establishment of currency as a means
of exchange, were largely local. Recognizing these limitations, among others,
Congress called for what is now known as the Constitutional Convention as a
means of amending the Articles of Confederation. One of the modifications
recognized as necessary was the establishment of the power to tax. This became
even more evident in the wake of the rebellion of Daniel Shays against what he
considered the onerous taxes levied by Massachusetts in an attempt to pay off its

war debts. As with the Stamp Act and its legacy of uniting the colonists against
the British, Shays Rebellion is cited as the final unifying factor bringing the new
states together in recognition the weaknesses of the Articles of Confederation
with regard to the powers to tax (Smith, 1998) and to embrace what is now known
as the Constitutional Convention (Adams, 1998).
Imbued with the spirit of both practicality and philosophy, the delegates to the
Constitutional Convention sought to develop a rational and accepted system of
centralized taxation. In an attempt to avert further rebellion, the following
popular notions concerning taxation were central to the constitutional debate:
Taxes are necessary, but fiscal controls on spending must go hand in hand
with any system of revenue
Following the tradition in Europe, the tax system was considered illegal if
the expenditure it supported was illegal. This tenet was applied most often
to European expenditures for offensive wars, considered illegitimate as far
back as the reign of Henry VII in 1497 (Adams, 1998).
The prohibition of taxation for offensive wars was stated in the US
Constitution, Article I, Section 8 as [t]he Congress shall have Power To

lay and collect Taxes, Duties, Imposts, and Excises, to pay the Debts and
provide for the common Defence ... of the Unites States and [t]o
provide for calling forth the Militia to execute the Laws of the Union,
suppress Insurrections, and repel Invasions (US Constitution as reprinted
in Mosher, 1976, 16-17).
Complementing these practical notions, the drafters of the constitution
incorporated major tenets of what was then the contemporary philosophical
thought concerning the relationship between a free people and its government,
particularly as it related to the power of that government to extract payments
through taxes. From Montesquieu, a healthy fear of direct taxation led to a
constitutional prohibition of such until the passage of the 16th Amendment in
1913. And, perhaps more importantly, from the social contract theory of John
Locke, and expressed by Adam Smith, the notions of uniformity and
apportionment of taxation found themselves directly expressed in the US
Constitution (Adams, 1984). Fearing the discrimination and selective immunities
present in the French tax system (Adams, 1998), the framers included in the US
Constitution the explicit requirement that all Duties, Imposts, and Excises shall
be uniform throughout the United States (US Constitution as reprinted in
Mosher, 1976, 16). To this was added Smiths notion of apportionment, that is

your share of the costs of the country.. .is measured by your share of the wealth
of the country... (Adams, 1998, 56). Today [t]he uniformity command is now
an empty shell, according to legal scholars, and the apportionment requirement
was annulled with the Sixteenth Amendment (Adams, 1998, 57). But even
before modem times, the ratification of the Constitution, with all of its protections
against undue tax burden, failed to quell the tax revolt in the United States, as
rebel leaders almost immediately claimed abandonment of the principles of
uniformity and prohibition on direct taxation.
Whiskey Rebellion of 1794, Fries Rebellion of 1798
The first acknowledged post Revolutionary War tax revolt against the government
formed by the newly ratified constitution was the Whiskey Rebellion of 1794.
The seeds for this revolt were planted when the federal government agreed to
assume the war debts of the states. Needing a way to pay for those debts,
Alexander Hamilton, as Secretary of the Treasury, imposed a 25% excise tax on
whiskey. This ill-conceived tax ran into resistance almost immediately, as it hit at
the heart of commerce in what was then the western frontier of the US.

In the western frontier, grain was a major commodity. However, it was both
expensive and onerous to transport grain over the mountains to the east where it
could be brought to market. As a remedy, the westerners found a solution in
whiskey. Grain could easily be distilled into whiskey, more easily transported
east, and as a result whiskey essentially became a medium of exchange for those
on the western frontier. Hamiltons whiskey tax, already hated simply for being
an excise, the most reviled of British taxes, met with unusual resistance from
those in the west, as it was a direct hit on their means of exchange (Gordon,
1996). Furthermore, argued the western frontiersmen, the whiskey tax violated
the new constitutions requirement for uniformity in taxation as no other
commodity was subject to the excise tax (Adams, 1998). The resulting rebellion
dissolved into threats of violent action against excise men, and, although
ultimately resolved without bloodshed, did result in President Washington
deploying the militia.
What the Whiskey Rebellion was to the Washington presidency, the Fries
Rebellion was to the Adams presidency. Instead of the hated excise tax, this time
the target of revolt was the newly enacted direct taxes on property in the form of
land, houses, and slaves. In order to comply with constitutional requirements, the
tax was apportioned to the states according to population. In this case, the

rebellion takes its name from John Fries, a resident of eastern Pennsylvania who
stormed the courthouse to free rebels arrested for rebelling against the property
tax. Like Washington, President Adams called out the militia and Fries ultimately
was arrested, convicted of treason, and sentenced to be hanged. Only a
presidential pardon saved Mr. Fries.
Both the Whiskey and Fries Rebellions, although significant, might have been lost
in history if it were not for the events of 1800. In what was perhaps the ultimate
tax revolt to date, in the election of 1800 the voters rejected the Federalist Party
and its tax policies, and found in Thomas Jefferson a president willing to repeal
the Hamiltonian taxes. Some have gone as far as to credit the earlier rebellions,
particularly the Whiskey Rebellion, with the demise of the Federalist Party and
the ascendancy to power, with Thomas Jeffersons election, of the Democratic-
Republican Party, the precursor to the modem day Democratic Party (Rothbard,
1994; Adams, 1998).
Revolt Against the Tariff and the Civil War: 1828-1861
Although not on everyones list of American tax revolts, there is some evidence
that the southern discontent with high tariffs, mostly protecting the newly

developing northern manufacturing economy from European competition, was
among the causes of the Civil War. Although some might consider this
revisionist history, there is emerging a view, although perhaps still a minority one,
that high tariffs were at least as much a cause of the Civil War as the issues of
states rights and slavery (Adams, 1998; Gordon, 1996). In fact, the issue of the
tariff is listed as the first cause of the war in the National Park Services education
literature for the Gettysburg National Military Park (Heiser, 2002). This view is
not without its detractors (Thorndike, 1998; McLemee, 1998); however,
notwithstanding the dissenting view, it is worth exploring the claim that the Civil
War was, in some sense, a continuation of the American tradition of tax revolt.
In the early to middle 1800s, the Federalist taxes were largely replaced with
tariffs. Early on, this met with little resistance, perhaps due to the same rationale
employed by the colonists in originally supporting the Crowns external taxes.
However, over time, these tariffs came to be seen as increasingly onerous by the
southern states. Essentially, the claim put forth by the southern states was that the
tariffs disproportionally burdened the south by protecting the output of the
northern industrial states from overseas competition, thus leaving the southerners
with a choice between overly expensive northern goods and foreign goods subject
to tariff (Adams, 1998; Gordon, 1996). Under this reasoning, the response to the

tariff from the south grew increasingly hostile and ultimately came to a head with
the election of Abraham Lincoln in 1860 and the resulting threat of secession by
the south. Some argue that Lincolns major interest in maintaining the union was
to preserve the contribution of the south, through the tariff, toward the funding of
the government (Adams, 1998).
The tariff as one root cause of the Civil War became enough of an issue that even
across the Atlantic Charles Dickens and John Stuart Mill debated the issue in the
English press. Although Mills position that slavery was solely at the root of the
war is the one that ultimately held in mainstream United States history, at the
time, Dickens countered that the unidimensional view of the struggle between
north and south as one over the issue of slavery was too simplistic. Today we
would explicitly acknowledge the economic incentive in maintaining the south as
part of the nation. In the 1860s, Dickens believed the same (Adams, 1998).
Although few would argue that the Civil War was solely a tax revolt, it appears
that resistance to what was considered unfair taxation had its part in the hostilities.

A New Direction: Progressive and Depression
Era Revolts 1900-1935
The first 100 years of existence of the United States were characterized by a fairly
consistent struggle over taxes with punctuated periods in which actual rebellions
occurred. In general, these early rebellions, with the exception of the Civil War,
shared similar characteristics. They were generally small-scale violent flare-ups,
occurring locally, and largely demonstrated poor command of the concepts of
organization or political action. The caricature of the 18th and 19th century tax
revolt would likely be one of an emotional, unruly mob rising violently against up
any vestige of taxing authority. This all began to change with the beginning of the
20th century. Probably the most interesting conceptualization of the early 20th
century tax revolt is to place it in contrast with the earlier eras of anti-tax activity.
If one were to define the eras of the first part of the 20th century, particularly as
they related to the relationship of individuals to their government, the salient
periods would be the Progressive Era at the turn of the century and the Depression
that began in the late 1920s. Not surprisingly, each of these eras contributed to
both the continuance and perhaps more importantly the maturing of the tax revolt.
In its maturity, the on-going struggle with taxes in America shifted both focus and

tactic. The unruly mob gave way to political organization, the tendency to
devolve into physical violence evolved into both political protest and the
imposition of accountability on leaders through direct initiative, the focus shifted
from federal taxes to state and local ones, on a philosophical level, the attention
shifted from revolt against a single tax such as the whiskey excise to a movement
intent on limiting the overall size and scope of government, and, overall, the
efforts against perceived undue tax burdens became increasingly professionalized.
The political influence of the Progressives coupled with the economic realities
presented by the Depression were central to the shifts that happened during the
first half of the 20th century, and in many ways left legacies that continue to frame
the tax revolt to this day.
From Focus on the Federal Government to Focus on
State and Local Governments
The shift from the focus on federal taxes to one on state and local taxes was
probably not as much a deliberate decision as it was a result of the changing tax
burden in the United States. Although the Coolidge tax cuts in the 1920s served
to reduce the burden of federal taxation, total per capita tax collections rose from
$68.28 in 1922 to $80.30 in 1929 (Beito, 1989). Given the decreases in federal

tax burden, the obvious source of the per capita increases was the imposition of
increasing tax burdens at the state and local level. Between 1920 and 1929, local
taxes grew from 3.3% to 5.4% of national income and state taxes grew from
0.83% to 1.9% of national income. Over the same period, federal taxes fell from
7.9% to 4.2% (Beito, 1989). While the federal government was proclaiming this
the era of tax relief, the actions of state and local governments were rendering any
federal relief essentially meaningless in the eye of the taxpayer.
The bulk of the state and local tax burden came from the property tax, the
majority of which came from the taxation of real property5. Compared with other
bases for taxation, particularly income and consumption, property taxes become
far more burdensome during difficult economic times. While taxes associated
with income and consumption generally vary directly with ability to pay, taxes on
real property often bear no relationship to the property owners ability to pay,
particularly in a society where ownership of real estate had become a notoriously
poor barometer by which to measure the comparative wealth of individuals
(Beito, 1989, 2). Under the circumstances surrounding the declining economy
5 Over the years, the base of the property tax narrowed as personal property and investment
property, far easier to hide from the assessors, was exempted (OSullivan, Sexton, and Sheffrin,
1995). This left real estate as the source of most property taxation and resulted in a transfer of the
relative burden away from those who held other forms of wealth.

and the increased reliance on the property tax, it is not surprising that the target of
the Depression Era outrage shifted from federal to state and local government.
This outrage found a voice as a result of the state-level reforms of the earlier
Progressive Era, particularly the adoption of the initiative as a means for citizens
to directly petition their government and determine policy. The combination of
outrage against the local property tax and an effective manner with which to
address it at the state and local level resulted in a fundamental shift in the focus of
the tax revolt away from the federal government.
Since state initiatives are the main instrument of the modem Tax
Revolt, they give the movement an extra dimension. The Tax Revolt
becomes not only an issue of the general interest versus special
interests, but it becomes one of state versus the federal government.
If the Tax Revolt had been focused on the federal government alone,
as in the so far unproductive drive for a constitutional amendment for
a federal spending limit, it would have failed (Adams, 1984, 176).
From a Victim Mentality to an Owner Mentality
Prior to the turn of the century Progressive Era, direct access to government was
generally out of reach for the ordinary citizen. As a result, the Americans of the
19th century often felt politically powerless in the face of taxation policies
imposed upon them. With the direct democracy reforms of the Progressive Era,
the relationship of citizen to government changed significantly.

The reforms of direct democracy came first to South Dakota where, in 1898, the
citizens amended their state constitution to adopt the initiative process. Following
South Dakota, by 1918, 18 other states had enacted the initiative, probably the
reform most responsible for the beginnings of the shift toward an ownership
mentality. Through this increased access to government and policy-making in
almost half the states in the nation, citizens earned themselves the right to affect
tax policy by voting directly to approve state debt and to pass restrictions limiting
taxes at the state level (Adams, 1984).
It was not only through initiative and other reforms of direct democracy that
citizens directly influenced the direction of tax policy. No longer content with
allowing such policy to be formed by a government perceived to be distant and
unresponsive to the burdens and hardships resulting from the tax code, citizens
formed taxpayer advocacy groups and began to directly influence the composition
of the tax code. According to Riccio (1992), thousands of such organizations
were formed during the Depression era, and many of them directly influenced tax
policy by, for example, calling for the replacement of a portion of the property tax
burden with alternative sources of revenue (Riccio, 1992; Beito, 1989). While
such recommendation might have fallen on deaf ears in the 19th century, the threat
of direct democracy, particularly in the western states where it was more

prevalent, provided citizens with additional ability to exert direct control over the
direction of tax policy. Daniel Smith sums up the change in mentality best.
In a twist from the days prior to the creation of the Republic, tax
crusaders now focus their attack on the principle of representative
government. While bemoaning the level and amount of their taxes,
they simultaneously take on the present system of government.
Representative somehow not a sufficient form of
governance when it comes to their hard-earned dollars. ...thepeople,
not their elected officials, must be the ones to determine how much a
government may tax and spend (Smith, 1998, 18, emphasis added).
From Localized Violence to Political Organization
What rifles were to the 19th century tax revolt, political action was to the 20th.
Rebellion that in the 19th century was characterized by a band of individuals
burning excise offices and shooting excise officers (Adams, 1998) in the 20th
century became sufficiently organized to be referred to as a movement (Thornton
and Weise, 2001). And, even when the tax revolt did take illegal forms, such as
1930-1933 tax strike in Chicago, the illegality did not manifest itself as violence
but rather as a well-organized protest by citizens refusing to pay their taxes
(Beito, 1989).

The evidence of the political organization of the tax revolt was widespread
beginning in the early part of the 20th century. Local organizations of taxpayers in
both rural and urban areas began to form, mobilize, and fight what were
considered to be unduly onerous tax burdens. This was especially prevalent
during the Depression. In the early 1930s, Associations of Real Estate Taxpayers
(ARETs) formed in most of the nations urban areas to represent the interests of
owners of real property. For a short time, there was even a national umbrella
organization of ARETs, coordinating tax resistance strategies, although this
national organization did not persist after the Depression years (Beito, 1989).
Political organization had begun to replace localized violent rebellion, and such
organization helped to replace violent action with new, albeit still illegal, form of
protest, the tax strike.
In rural areas, the evidence of the evolution from violence to organization was
perhaps even more compelling. Due to the fact that many early 20th century
farmers were real property rich and wealth poor, rural areas were unusually hard
hit with property tax delinquencies when farm incomes declined precipitously
during the Depression (Beito, 1989). In response to these tax delinquencies, local
governments held tax sales at which they would sell tax titles to a third party
willing to make the delinquent tax payment. The tax title then gave the third party

the right to collect back taxes and associated penalties from the landowner, and in
the event of continued failure to pay, the right to sue for title to the property.
Given the often violent nature of the 19th century tax revolt, it would be easy to
imagine such tax sales erupting into a similar melee. Instead, the most common
form of resistance to the tax sales was the formation of tax protest associations
who were often organized and financed well enough to preclude independent third
parties from obtaining the tax title. In January 1933, a crowd of farmers in
Doyleston, Pennsylvania, overran a tax sale, purchased the title for $1.18, and
then returned it to the owner. All across the country, farmers emulated this dollar
sale strategy not only to resist taxes but to prevent mortgage foreclosures (Beito,
1989, 9)
Finally, it may be argued that the most far-reaching and long lasting outcome of
the replacement of violence with political organization was the passage of the 21st
amendment to the constitution repealing prohibition (Thornton and Weise, 2001).
Although not commonly recognized as a component of the tax revolt, the repeal
of prohibition was very much so. Repeal facilitated the reduction of property tax
burdens by replacing the lost revenue with taxes and licensing fees related to the
distillation, distribution, and sale of alcohol. For this reason, taxpayer
associations threw their weight and organization into this fight. Prohibition

wiped out sales tax and licensing revenues going to city, county, and state
governments. Repeal re-established these revenues, permitting property taxes to
be reduced. Repeal, therefore, brought victory to the tax resistance movement
whose primary aim was to reduce the burden of the property tax (Thornton and
Weise, 2001, 100). For years, other illegal, often violent forces were unsuccessful
in bringing about the repeal of prohibition, something the politically organized tax
revolt was ultimately able to achieve.
From Revolts Against Specific Taxes to a Movement
to Limit the Scope of Government
The tax revolts philosophical change toward a focus on limiting the scope of
government is the 20th century change with the strongest legacy today. Although
the 18th and 19th century tax revolt recognized the need to curtail spending in
order to keep taxes low (Adams, 1998), the shift from limiting taxes to shrinking
the size of government was a uniquely 20th century refocus of the rebellion.
This shift happened slowly. Early in the 20th century, the tax revolt viewed
growth in government through an intergenerational lens and fought to require
voter approval for bond issues or even constitutional prohibitions against general

obligation debt at the state level. Through these limitations, government was
precluded from growing on the backs of future generations (Adams, 1984). The
push for smaller government continued during the Depression era when the
concepts of base broadening and replacement taxes as tradeoffs for reductions in
the property began to receive fire. Although not yet universally accepted dogma
of the property tax resistance movement, many taxpayer advocacy organizations
began to resist replacement taxes and base broadenings unless completely offset
by a reduction in real property taxes (Beito, 1989, 12-13). The tax revolt was no
longer simply a rebellion against a particular tax such as the whiskey excise or the
property tax, and the argument no longer centered on the uniformity or legitimacy
of a particular tax. By the early 1930s, the target of the resistance was coming to
be the broader issue of limited government, and any revenue perceived to be
supporting the growth of government came to be seen as illegitimate. This was
particularly true in rural America.
Writing in 1934 for Social Forces, James Babcock highlighted
the anti-big-govemment overtones of the farm revolt.
Babcock noted that in the 1920s, education for cooperation
was looked upon as a solution for economic ills. Today
farmers are saying: Schools cost too much. Teachers are
paid too much money. We are going broke supporting our
schools. I say abolish the county agent (Beito, 1999, 11).

As will be seen below, the movement to limit the scope of government has
reached full maturity with the current day tax revolt. Helped along by national
networks of professional tax limitation organizations, todays tax revolt targets
states with complex legal language curbing the growth in government revenues to
a set percentage growth, regardless of the revenue generating capacity of the
current tax system. The genesis of such thinking is largely found in the early 20th
century shift away from solely a single tax focus.
From Amateurs to Professionals
Probably as much by necessity as by design, the tax revolt found itself with
professional leaders in the early part of the 20th century. Following the model of
the Progressive Era government research bureaus and state tax commissions
(Riccio, 1992), and at times even in opposition to what was perceived as their
continued support of the increasing role of government (Beito, 1989), the
Depression era leaders of the tax revolt formed professional organizations to
represent taxpayers in their struggle against the government. In the urban areas,
these organizations largely took the form of the ARETs representing real estate
taxpayers. Although more informal in the rural areas, granges and state tax
leagues formed to represent members from non-urban communities. Often these

rural based organizations worked in coalition to achieve their successes as did the
Ohio State Grange, which as member of a coalition worked to pass a tax-
limitation law in Ohio (Beito, 1989). Reference to such professionalization is as
absent in the written history of the 19th century tax revolt as it is prevalent in the
history of the 20th century. To this day, many member organizations of the
National Taxpayers Conference, a trade association for taxpayer watchdog
groups, trace their ancestry to the Depression era professionalization of the tax
Recap: From Rebellion to Movement
The tax revolt matured and consolidated its focus in the first third of the 20th
century. No longer characterized by localized violent crescendos, the maturing
tax revolt was political, deliberate, focused, professional, and largely non-violent.
Its adherents learned to use the new tools of governance, particularly the direct
democracy reforms of the Progressive era to further its cause (Smith, 1998), and
as a result they began to achieve success politically by pressuring states and local
governments to both limit taxes and in some cases to limit the overall scope of
government. The tradeoff of violence for political action also served to broaden
the base of support for tax revolt activities, ultimately moving the effort from

what would have been characterized earlier as a limited rebellion to a nation-
wide, well-organized movement. As will be demonstrated in the next section, this
transformation paved the way for the tax limitation earthquake that was
Californias Proposition 13 and the resulting birth of the fiscal cap tax and
expenditure limitation movement that continues today.
The Modem Tax Revolt, Fiscal Cap TELs, and TABOR
When proposition 13 passed, we did not win the war on taxes.
With proposition 13, we won the first major battle in the war
Howard Jarvis
Although many scholars argue that Californias 1978 Proposition 13 was the
initiating event of the modem tax revolt (Sexton, Sheffrin, and OSullivan, 1999;
Downes and Figlio, 1999; Smith, 1998), it might be as easy to mount an argument
that, in retrospect, Proposition 13 was in fact the final act of the property tax
revolt script that had been a work in progress since the Depression era (Kuttner,
1980). Regardless of whether Proposition 13 was a commencement or a
crescendo, the date 1978 acts as a demarcation in the chronology of the tax revolt
in the United States. With the passage of Proposition 13 by Californias voters,
and to a lesser extent Proposition 2'A by Massachusetts voters and legislators, the
marriage of direct democracy and tax revolt matured in the states (Smith, 1998),

and the modem tax revolt, whose true legacy would not be property tax
limitations but rather fiscal cap TELs (Cox and Lowery, 1990), was bom.
Propositions 13 and 2/4
To students of history, the precipitating events that led to Proposition 13 should
have foretold the earthquake in public tax policy that was about to occur. As was
the case with the property tax revolts of the Depression era, although for distinctly
different reasons, the property tax in California in the years immediately
preceding the passage of Proposition 13 had become an increasingly burdensome
tax. During the Great Depression, falling incomes increased the effective burden
of the property tax (Beito, 1989). In California in the 1970s, the increasing
burden resulted from rapid inflation in housing valuations that, in light of the
governments slow action to reduce mill levies, resulted in significant property tax
increases (OSullivan, Sexton, and Sheffrin, 1995). In both cases, as property
taxes came to be seen as unduly burdensome, revolt occurred.
Revolt in California took the form of probably the most famous tax policy citizen
initiative to date. Proposition 13, passed by an almost 2 to 1 margin, wrote
significant property tax reduction into the states constitution. Specifically, after

the passage of Proposition 13, Californias property taxes were limited in the
following ways (OSullivan, Sexton, and Sheffrin, 1995):
The property tax rate was limited to 1% with an exception made for
property taxes supporting prior indebtedness.
All property was assessed at 1975-76 values for taxation purposes.
The assessed values were permitted to increase as inflation increased
housing prices, but that increase was limited to 2% annually as long as the
property ownership did not change. Upon sale of property, the property
was reassessed at market value, usually the purchase price. This is what
has come to be known as an acquisition value tax system.
Additional property taxes, sales taxes, or transaction taxes on real property
were constitutionally prohibited.
Californias Proposition 13 had a kid brother across the nation in Massachusetts.
In Massachusetts it was over-reliance on the property tax rather than rapid
inflation that lent steam to the property tax revolt (OSullivan, Sexton, and
Sheffrin, 1995). Nonetheless, heartened by the 1978 victory in California,
proponents of Proposition 2/z successfully navigated Massachusetts system of
indirect initiative to victory two years later in 1980. As a result, voters in
Massachusetts joined those in California in codifying property tax limitation

language into their state constitution. Upon passage of Proposition 2'A, the
Massachusetts constitution contained the following provisions (Adams, 1984):
A property tax rate limit of 214% of full and fair cash value of the
A provision requiring any local governments currently over the limit to cut
their levies by 15% per year until they were in compliance with the 2Vi%
A requirement that once at the limit, local property taxes could only
increase by 2/4% per year.
A reduction in the automobile excise tax to $25 per thousand, at the time a
60% reduction.
Non-fiscal provisions including the ability for local governments to ignore
unfunded state mandates, the abolition of the autonomy of local school
boards, and the prohibition of binding arbitration for labor disputes for
public safety workers.
In both the case of California and Massachusetts, government officials in those
states were immediately faced with the crisis of maintaining the solvency of local
government in the face of the significant reduction in property tax revenues, and
in both cases the immediate practical result was a shift in funding of local services

from the local to state government. Over time, local governments in both states
shifted to more fee-based funding of services (Adams, 1984; OSullivan, Sexton,
and Sheffrin, 1995), fundamentally shifting the basket of services provided in
favor of those that could be supported by user fees. In California, the acquisition
value system created by Proposition 13 had effects beyond simply reducing the
effective rate of property taxation. Since property was not reassessed to market
until a property transfer occurred, homeowners now had an incentive to remain in
their current homes. Essentially, Proposition 13 acted, and still acts, as a tax on
mobility. Over time, this had myriad impacts throughout the state. Horizontal
equity was greatly impacted as neighbors living in effectively similar homes and
accessing the same level of public services could be bearing vastly different
property tax burdens simply due to when they purchased their homes (OSullivan,
Sexton, and Sheffrin, 1995). Across the state, this impact played out differently
depending upon the degree to which the residents of the particular community
were transient. Interestingly, given the fact that the elderly and lower income
residents of California were the least likely to move, Proposition 13 introduced
increasing progressivity into the states tax code (OSullivan, Sexton, and
Sheffrin, 1995).

With any specific tax change, citizens alter their decisions in response to the
incentives provided by the tax. Economists refer to such behavioral changes as
the distortionary effect of taxation (Bruce, 2001). Clearly Propositions 13 and 2/4
brought with them distortions to the economies of California and Massachusetts.
In California these distortions were both economic and geographic. Perhaps
because of these distortionary effects and other unintended consequences, or
perhaps by happenstance, the tax revolt took on a different form in the wake of
Propositions 13 and 2V4. As 13 and 2/4 were gamering all of the attention and
headlines, there was a quieter movement brewing, one that would ultimately
eclipse the specific revolt against the property tax. In fact, history now
demonstrates that if Jarvis and Gann, the policy entrepreneurs behind Proposition
13, were the daddies of the modem tax revolt, then the granddaddy of the modem
tax revolt might actually, and unwittingly, have been Ronald Reagan, someone
more famous for actions largely separate from the modem day tax revolt in the
states. Yet, Ronald Reagans 1973 Proposition 1, a failed attempt to place a
comprehensive limit on overall public spending in California rather than
specifically placing a ceiling one specific tax, the property tax, is probably the
true intellectual ancestor of the modem TEL movement.

Prop 1, Headlee, and the Modern TEL Movement
Proposition 13 created instant shock-waves nationally [and] ... seemed to signal
to legislators that government had to live within limits (Kuttner, 1980, 17). And,
in retrospect, living within limits translated in many of the states into fiscal cap
style tax and expenditure limitations rather than single tax limitations such as
those on the property tax. Even though Californias Proposition 1 failed at the
polls, the idea caught on, particularly in Michigan, where in November 1978, five
months after the passage of Proposition 13, voters overwhelmingly approved one
of the nations earliest fiscal cap TELs, the Headlee Amendment, named for its
campaign leader Richard Headlee. The proponents of the Headlee Amendment
designed both their ballot measure and their campaign after Californias
Proposition 1 (Adams, 1984). Interestingly, at the same election, Michigan voters
defeated a measure aimed specifically at property tax limitation, and in the wake
of Proposition 13, only two states passed specific limitations on the property tax
(Cox and Lowery, 1990). Clearly the legacy to be written by the post Proposition
13 tax revolt was that of fiscal caps.
Fiscal cap style TELs differ from limitations on specific taxes in manners relating
to both structure of the limitation as well as political acceptability. Unlike

Proposition 13 type property tax measures that roll back property tax levies to
levels from previous years and limit subsequent growth, fiscal caps approach tax
limitation in an almost opposite fashion. While most property tax limitations
mandate immediate reductions, fiscal caps are forward looking. The fiscal caps
implemented in the states take the current levels of taxing and spending as a base
and limit future growth in revenues or expenditures to a set metric (Wildavsky,
1980). And, while property tax limitations limit only the property tax, most fiscal
caps on revenue comprehensively limit all forms of revenue, thus imposing a
more comprehensive attack on the growth of the public sector. For both of these
reasons, as well as the recognition that most citizens do not favor the drastic
program cuts often necessitated by property tax roll-backs (Citrin, 1978; Courant,
Gramlich, and Rubinfeld, 1981), fiscal caps were perceived as more politically
palatable than rollbacks and subsequent limitations on the property tax only (Cox
and Lowery, 1990). Since the 1978 beginning of the modem tax revolt and
including the latest general election, 30 states6 now have some form of fiscal cap
style TEL, and in some states, particularly Colorado and Missouri, multiple TELs
6 Maine (2005), Wisconsin (2001 but not implemented until the 2003-05 biennium), and Indiana
(2002) were the last three states to pass fiscal cap TELs. As will be seen later in the chapter on
data and methods, these three states are outside the study period for this research and will not be
included as TEL states in this study.

govern. Appendix A outlines the key provisions of the TELs in the states whose
TELs were operable during the period of study for this research (1992-2002).
As Appendix A demonstrates, TELs vary by state. However, they may be
defined and characterized according to a basic set of characteristics. These
characteristics, listed below and evaluated later in this dissertation, distinguish
TELs from each other, both in terms of substance and restrictiveness. It is this
variation that will serve as some of the basis of analysis for this research. In
general, fiscal cap TELs may be characterized according to their treatment of the
following characteristics:
The legal authority for the limitation
The method by which the limitation was proposed and approved
The formula by which expenditures and/or revenues are permitted to grow
under the limit
The base, revenues or expenditures or both, to which the growth limit
The provisions for waiving the limit
The treatment of any surplus revenue
The requirements for approval of any subsequent tax increases

While TEL states vary in their treatment of each of the above characteristics, they
share one simple trait: they have all approved an overall fiscal cap limit on the
growth of government. It is relevant, then, to the understanding of the modem tax
revolt to better understand whether there are shared political, economic or other
characteristics among the fiscal cap TEL states.
Why do TELs Pass?
In the wake of Californias Proposition 13 and Massachusetts Proposition 2 V2, as
many other states began to enact their own forms of TELs, scholars turned to the
question of why citizens and/or legislators pass limitation language into the state
statutes or constitution. The early studies, some covering measures that preceded
1978, were largely single state focused, exploring motivations of voters in support
of early measures in California (Levy, 1975), Massachusetts (Ladd and Wilson,
1982; Ladd and Wilson, 1983; Cutler, Elmendorf, and Zechhauser, 1999), and
Michigan (Mariotti, 1978; Gramlich, Rubinfeld, and Swift, 1981; Courant,
Gramlich, and Rubinfeld, 1997). In general, findings from the majority of the
early single state analyses suggest that voters supported limitations in hopes of
receiving the same level of public services, but with a reduced tax burden. Either
there is a real or perceived level of inefficiency in the public sector, one that

might be eliminated through the imposition of a limit, or voters are suffering from
free lunch illusion (Temple, 1996). However, one must never underestimate an
Americans desire for a free lunch; it is nearly universal. As such, the quest for
the free lunch is somewhat unsatisfactory as an explanation of why some states
pass limits while others do not. Later into the modem tax revolt, multi state
explorations of cross sectional data over time provide a more detailed explanation
of the determinants of the passage of TELs
Aim and Skidmore (1999) studied all TELs (fiscal cap TELs as well as single tax
focused limitations such as property tax limits) that were decided by the voters in
the period 1978-1990; legislatively enacted limitations were not included in their
study. This study found five significant determinants of voter behavior with
respect to TELs, one negatively significant and four positively significant
variables. Surprisingly, Aim and Skidmore found that an increase in revenue at
the state level was associated with a reduction in the passage of TELs while an
increase in local revenues relative to state revenues was associated with an
increase in the enactment of TELs. One possible explanation for this seemingly
contradictory finding is the level of dissatisfaction with the local property tax, and
this hypothesis is supported by the fact that TELs are more likely to pass in states
that have experienced an increase in property taxation. Additionally, as personal

income in the state and as the tax price of public services increased, the passage
rate for TELs increased. As of the 1990 end of Aim and Skidmores study period,
states with an existing limit were less likely to pass a subsequent limit; however,
in the years following this study at least five states, Colorado, Missouri,
Connecticut7, Washington, and Oregon, have passed multiple limits. In the Aim
and Skidmore study, demographic features of the state, political factors, and
specifics of the composition of the limit were all found to be insignificant is
determining the passage of TELs. This early period of the tax revolt appears to be
largely driven by a general dissatisfaction with property taxes and the rate of
spending on local public services.
Characteristics of Fiscal Cap TEL States
Interestingly, a retrospective and descriptive look at the 27 states that operated
under broad based fiscal cap style TELs during the 1982-2002 study period for
this research paints a picture slightly different picture than the one in the Aim and
Skidmore (1999) study of all citizen approved limitations. While Aim and
Skidmore (1999) found that political demographics did not affect the passage rate
7 Connecticuts 1992 constitutional limit, although approved by the voters, has not taken effect
because it has failed to receive the required three-fifths vote in the legislature.

of limits, of the 27 fiscal cap TEL states, 74% were governed by Democratic
governors at the time of the passage of their TEL The descriptive statistics
present a similarly contradictory picture concerning the level of personal income
in TEL and non-TEL states. As of both 1979, the beginning of the fiscal cap TEL
movement, as well as 1986, the midpoint of the movement, the states that had
already enacted TELs or would do so in subsequent years did not, on average,
have significantly higher levels of personal income than the states that to this day
have not enacted fiscal cap TELs8 9. Figure 1 below demonstrates this relationship,
and t tests of the difference between the means were insignificant for both
periods. For fiscal cap TELs as a subset of all limits, the income effect appears to
be insignificant, contradictory to the Aim and Skidmore (1999) findings.
8 This statistic came from data collected on political control for this dissertation research.
9 This statistic came from data collected on political control for this dissertation research.

$14,867 $14,420
1979 1986
Source: Bureau of Economic Analysis
TEL states DNon TEL States
STATES, 1979-1986
One final characteristic of fiscal cap TEL states warrants investigation. As Smith
(1998, p. xi) observes limitation initiatives tend to spring from the only
legitimate fountain of authority the people. It is the citizens, after all, and not
their unresponsive elected officials..., who place initiatives on state ballots.
Under this premise, one would hypothesize that a shared characteristic of TEL
states would be the ability for their citizens to petition to the ballot with either
statutory or constitutional language. Yet, the descriptive statistics again paint a
somewhat contradictory picture. Of the currently 30 states with fiscal cap TELs,

only 16 have some form of direct democracy available to their citizens. Ten of the
TEL states allow citizens to directly petition for constitutional change, four allow
for direct initiatives to the statutes, and two states have an indirect initiative
process in which citizens may petition to the ballot with legislative approval10.
Direct democracy does not appear to be a determining factor in the passage of
TELs; however, as scholars (Kenyon and Benker, 1984: Shannon and Calkins,
1983) have argued, the mere threat of TELs represented by the direct democracy
states may be sufficient for legislative action in the states without direct
democracy. Under this hypothesis, direct democracy states would be expected to
be in the lead in enacting TELs. Figure 2 below shows that to some extent the
direct democracy states did lead the way. Of the first 15 TELs enacted, ten of
them were in direct democracy states, lending support to the hypothesis that the
enactment of limits in the direct democracy states provided incentive for the
legislatures in the non-direct democracy states to act.
10 These findings were compiled from the data in appendix A and data on direct democracy in the
states from the initiative and Referendum Institute at the University of Southern California.

Parsing the direct democracy data even further lends one further conclusion.
States with the direct constitutional initiative are twice as likely to pass TELs that
are embedded in the states constitution than are states that do not allow the direct
constitutional initiative to their citizens. Of the currently 30 TEL states, in the
states with the constitutional initiative, 80% of the TELs are in the states
constitution. In the states without the constitutional initiative process, only 40%
of TELs are embedded. As the modem tax revolt matures from a general fiscal
cap TEL movement to specifically a Taxpayers Bill of Rights (TABOR)
movement, the existence of the direct constitutional initiative is likely to be a
shared characteristic of TABOR states.

The Modem Tax Revolt Take Two: The TABOR Movement
Although the change is just beginning, the modem tax revolt that for the past two
decades has been largely characterized in the states by the passage of fiscal cap
TELs once again appears to be evolving. With the 1992 passage of Colorados
TABOR amendment, for the first time in the states a TEL was passed that treats
all of the above listed characteristics in the most restrictive of manners. Among
those characteristics is the method of codification of the measure, and there is
widespread agreement among scholars that constitutional measures are more
restrictive than statutory ones (New, 2003; Sepp, 1999). Almost immediately
after the passage of TABOR, Colorado was both recognized and emulated as the
state with the most restrictive tax and expenditure limitation language. Building
upon this recognition, national organizations began to mobilize their efforts both
to support and oppose such measures in the states, and given the effort to make
such measures constitutional, the constitutional initiative states became the early
The American Legislative Exchange Council (ALEC) drafted model TABOR
language (American Legislative Exchange Council, 2006), crafted largely from

Colorados constitutional language, and in the 2006 election, that language or a
close variant of it has been on the ballot in at three states, two of which provide
for the constitutional citizen initiative. Organized opposition to the measures in
these three states extended beyond the local opponents to national organizations
such as the Center on Budget and Policy Priorities, and in the 2006 election, the
organized opposition appears to have won the day. Each of the measures was
defeated at the polls, but the campaigns seem to have ushered in a new era. In
this new century, the state level tax revolt, a post Proposition 13 phenomena, has
become a national movement and the marriage between direct democracy and the
tax revolt recognized by Smith (1998) appears to be reaching its golden years.

While the TEL movement has an obvious political history that may be traced
principally to the 1978 passage of Proposition 13 in California, it has an
intellectual history as well. Its intellectual history is largely rooted in the
challenge that public choice theory posed to the traditional public finance
orthodoxy represented by scholars such as Richard Musgrave (Brennan and
Buchanan, 2007). Along one dimension, this challenge may be characterized as
one addressing the presumed objectives of public officials. While orthodox
public finance implicitly assumed that officials seek to maximize the general
societal well-being, public choice economists characterized the maximand more
selfishly. That is, to public choice economists, an official with governmental
powers uses position within government to maximize his or her own personal
objective (Bruce, 2001). It is to this presumed more self-referential objective that
the use of constitutional restraints such as TELs was first addressed by the public
choice community. This review of the literature begins with the public choice

literature as the intellectual ballast for both the TEL movement and this
dissertations research hypotheses and then pairs this intellectual history with the
more policy-based analysis on both the intended and unintended consequences of
Public Choice Theory: Leviathan Government
Constitutional government in the United States has been characterized as a
Faustian bargain (Ostrom, 1984). People grant governments the right to use an
instrument of evil, coercive power, in exchange for the improved public order that
such power can promote if used wisely (Racheter and Wagner, 1999, 1).
Flowever, often in the perception of the governed, government goes beyond using
such coercive powers wisely (the benevolent despot model) and instead uses them
oppressively. The term given to this oppressive and authoritarian government is
Leviathan. This form of oppression comes in many varieties and may relate to
excessive government powers with respect to government power over civil
liberties, regulation, financial affairs, and taxation (Racheter and Wagner, 1999,
5); for this dissertation the relevant oppression is the one related to the misuse of
the power of taxation and other fiscal policy. It is within the context of the
assumption of Leviathan powers of government that the TEL movement, as a

form of constitutional constraint (Buchanan and Musgrave, 1999), makes both
contextual and historical sense and, as a result, may be perceived as effective.
New ways of evading constitutional limitations on government lead in turn to
renewed interest in constitutional limitations, including new forms of limitations
(Racheter and Wagner, 1999, p. 5).
For TELs or other constitutional limitations to be an appropriate policy response,
the proposition of Leviathan government rather than the Musgravian orthodoxy
(Musgrave and Musgrave, 1973) must be established. In a retrospective
consideration of the effects of Proposition 13 and the other limits passed in its
wake, McGuire (1999) attempts to establish Leviathan as the appropriate
characterization of the state. For comparative purposes, she sets up the dichotomy
between Leviathan and median voter/benevolent dictator models (the earlier
public finance orthodoxy) of government and argues that binding limits in the
presence of the perceived service degradation that accompanies them are, in and
of themselves, prima facie evidence of Leviathan. This evidence comes from the
fact that, under the median voter model of government, the median voter would
vote to override the limit to restore services. The absence of such actions, argues
McGuire, is support to the hypothesis of Leviathan and thus leads to the following
conclusion. [I]f the Leviathan/budget-maximizing-bureaucratic model of local

government behavior is in effect, then state-imposed limits on local government
fiscal behavior are likely to improve efficiency, by eliminating wasteful
expenditures, and improve social welfare, by bringing the level of taxes and
expenditures more in line with voters preferences (McGuire, 1999, p. 136). It is
from this theoretical perspective that the public choice literature contributes to an
understanding of the effects of limiting Leviathan.
Public choice theory analyzes political behavior through the lens of the economic,
maximizing agent (Bruce, 2001; Mueller, 1989; Buchanan and Tullock, 1962;
Ordeshook, 1993; Hotelling, 1929). In this sense, all political actors, citizens,
elected officials, and bureaucrats, attempt to maximize a specific objective. For
this research, the relevant actor is the elected official and the corresponding
objective is the chance of being elected or reelected (Bruce, 2001). In a public
choice view, elected officials make public decisions, both concerning spending
and otherwise, to maximize their chances for (re)election, and rarely from a
concern for the public interest exclusively (Bruce, 2001; Mueller, 1989; Green
and Shapiro, 1994). Speaking of elected officials, Bruce notes that [a] realistic
assumption is that their primary motive is to maximize their chance of being
elected or reelected to political office. This does not mean that politicians always
put their desire to be elected before a higher public interest, but cases where

politicians put principles before election are rare enough to be considered
newsworthy (Bruce, 2001, 145). Green and Shapiro (1994), although critical of
the rational choice perspective, concur that the general theory supports the
reelection hypothesis. In most rational choice accounts parties try to maximize
their chances of electoral victory rather than any particular ideological agenda
(Green and Shapiro, 1994, 4).
Under the Leviathan model of government (Brennan and Buchanan, 1980), using
TELs to limit the latitude and flexibility of elected officials vis-a-vis tax and
spending policy is a sensible counterbalance to the officials presumed objectives.
Elected officials are theorized to financially support a particular policy agenda as
a means to gain reelection (Dalleck, 1979; Greenstein, 1982). In this context,
they make decisions concerning the support of a particular taxing policy
depending upon whether the policy action will impact a reelection bid (Jacobson,
1993) or simply maximize their individual power by maximizing the income
controlled by government (Buchanan and Brennan, 1979). Buchanan and
Brennan (1979) present the following formal model of government that helps to
further conceptualize the objective of elected officials:

Equation 3.1: Y = R-G
Where Y is total income or surplus to government
R is aggregate tax revenue
G is expenditure on public goods.
The assertion is that the natural incentive of government officials seeking
reelection is to maximize Y. If one believes this view of the world, maximization
of Y requires either maximization of R or minimization of G, or perhaps both.
Further examination of this simple relationship, coupled with the assumption that
the elected officials at the helm in the government are interested in reelection,
suggests that minimization of G is not a strategy likely to be followed. Politicians
interested in reelection will provide programs and services to their constituents
(Buchanan and Musgrave, 1999).
Examining this further, if provision of government services is necessary, it takes
revenue to provide those services, and the use of debt is assumed not to be an
option", the relationship above may be further summarized as follows: 11
11 49 of the 50 states have balanced budget requirements essentially precluding the use of debt to
fund on-going government operations.

Equation 3.2: G =/( R )
where the functional form of this relationship takes the form G = a R and
0 < a < 1.
That is, expenditures on government programs will be a proportion of revenue
and that proportion will lie somewhere between zero and one. Government
officials will spend a positive portion of their total revenue on providing services.
The predicted level of that proportion depends upon the theoretical basis upon
which one relies when evaluating the behavior of government officials. For
Brennan and Buchanan (1979, p. 13), who treat government as an income
maximizer the predicted level of a will be as small as possible to satisfy the
social contract. Under the more traditional public choice assumptions of authors
such as Bruce (2001), a will be closer to unity, as government officials spend
revenue on programs in order to curry favor with the electorate in the hopes of
reelection. In either case, a restatement of the Y = R G equation with the
relationship between R and G above, yields the following equation for
government revenue:

Equation 3.3: Y = R aR or Y = (1-a) R.
Whether ones objective is to maximize Y as in Brennan and Buchanans (1979)
model or to maximize G or aR as in Bruces (2001), it is fairly easy to
demonstrate an officials incentive to maximize R, as maximization of R achieves
either objective. It is to this incentive that tax and expenditure limitations are the
response. Constitutional tax limits are explicitly designed to prevent government
from taking actions [concerning revenues] which, over an indefinite future, it is
believed they would have taken, electoral restraints notwithstanding... (Brennan
and Buchanan, 1979, 13, emphasis in original).
So, effective constitutional limits limit the revenue actions taken by public
officials. And, from the public choice perspective, it is easy to demonstrate that
the most efficient manner for constraining government is with a limit that most
effectively bounds the revenue side of the budget equation. Only a strict limit on
R counters the incentive of elected officials to spend, and the literature supports
the notion that limits constructed in the most restrictive manner are effective at
limiting R (Sepp, 1999; Stansel, 1994).

However, as with any policy, there are unintended consequences along with the
intended one(s) and the fiscal institutions of tax and expenditure limitations are no
exception. In this area, one of the major and yet largely unstudied unintended
consequences of TELs is in the area of tax reform; however, the literature does
support the proposition that fiscal institutions such as constitutional limits on
taxing and spending do have economic effects with respect to governments
response to deficits and the amelioration of such (Poterba, 1994). It is therefore
reasonable to hypothesize, as do Martell and Teske (2007) that the existence of
TELs will preclude, or at least impede, state level reform of the existing tax code
by eliminating the flexibility of elected officials to change R. This relationship
between the existence of TELs and the ability for a state to enact tax reform leads
to the first hypothesis to be tested by this dissertation:
H1: The existence of a state level fiscal cap TEL impedes a states ability to enact
changes to its tax code.
The literature, led by the public choice authors but supported by a cadre of TEL
researchers (ACIR, 1977; Shannon and Caulkins, 1983; Kenyon and Benker,
1984; Preston and Ichniowski, 1991; Dye and McGuire, 1997; Shadbegian, 1998),
supports the notion that limiting government action through a TEL impacts the

latitude and flexibility of elected officials vis-a-vis taxing and spending. Both the
empirical TEL literature and the theoretical rational choice literature demonstrate
that such limits, under certain circumstances related to the structure of the limit,
can have the intended effect of limiting the size of government. It is plausible,
then, to hypothesize that such limits of flexibility will have the unintended
consequence of impeding structural tax code changes, and that TELs may vary in
their impact on tax reform, perhaps depending upon the structure of the particular
However, the literature is not without dissenting voices. Green and Shapiro
(1994) argue that the simple desire for reelection is too limiting an objective
function for elected officials, thus casting doubt on the foundations of the rational
choice model of behavior. Elected officials, they argue, may also support what
they consider to be good policy as a complement to the unidimensional objective
of reelection. And, a core of the research on the effects of TELs supports the
proposition that TELs have no impact on the size and scope of government
(Inman, 1979; Bails, 1982; Abrams and Dougan, 1986; Howard, 1989; Cox and
Lowery, 1990). If TELs have no impact on the size and scope of government,
perhaps they have none on the ability of officials to reform state tax codes. It is to

this debate in the literature on the intended consequences of TELs that this review
now turns.
TELs and Their Intended Consequences: Do TELs Limit Government?
The exploration of the relatively simple question of whether fiscal cap style TELs
are effective in achieving their stated purpose, a reduction in the size of
government, is almost as varied as it is old. Not surprisingly, the literature began
to consider this question 25 years ago, just after the inception of the modem tax
revolt and the passage of the earliest fiscal cap measures. The only constant
among the various evaluations is that there is not one. From the beginning and to
date, there remains no consensus over the question of whether TELs actually
achieve their intended consequence. That is, do TELs effectively limit the growth
of government? And, in a related manner for this dissertation, is there a
reasonable expectation that such restrictions would affect state tax reform
activities? The relevant literature is summarized below, chronologically. The
treatment of this literature in a chronological manner rather than by research
conclusion both supports the cumulative nature of this body of work and
demonstrates that over time, the findings continued to vary.

One of the earliest evaluations of the impact of the modem tax revolt came from
the Advisory Commission on Intergovernmental Relations (ACIR). The ACIR
(1977) study measured the impact of local tax levy limits and concluded, through
econometric analysis, that such limits do serve to reduce government spending.
Surprisingly at the time, but consistent with the later lack of consensus on the
question of the effectiveness of TELs, Inman (1979) regressed government
spending on a differently specified regression equation that also included the
existence of levy limits as a dummy variable and came to the opposite conclusion
to that of the ACIR.
Following ACIR (1977) and Inman (1979), much of the other early research on
the subject of intended consequences was not empirical but rather theoretical.
Ladd (1978) used an economic model of the behavior of local elected officials to
evaluate the costs and benefits of limits as well as the predicted ability of limits to
achieve relief in the burden of local property tax. Under the assumptions of her
model, she found that the benefits of controls in limiting local expenditures are
likely to be outweighed by the costs in the form of service distortions.
Furthermore, she found only partial support for the use of TELs as a means of
successfully limiting the local property tax. Under some specific assumptions

regarding the role of intergovernmental aid, Ladds model provided evidence that
TELs are justified as a means of limiting the burden of the local property tax.
Due to the lack of a time series of government performance data, other early
studies relied on other non-empirical methods for evaluating the question of the
effectiveness of TELs. Bails (1982) used simulation methods to come to the
conclusion that the contemporary breed of TELs, those written by legislators with
the purpose of placing limits on themselves, was largely ineffective. The
weaknesses in these legislatively constructed limits were related to both the
generosity with which the limits were written and in the potential to use
mechanisms included in the limits, such as the declaration of an emergency, to
exceed the limit. Gold (1983) used survey research methods to query state
officials for their opinions concerning the effectiveness of their respective state
TELs. Only officials from Colorado12 and Hawaii reported that their limits had
been effective in limiting the growth of spending at the state level.
Shannon and Calkins (1983) approached the issue form a more theoretical
perspective. They argued that the early stages of the tax revolt sent a symbolic
12 Note that this is an earlier limit in place in Colorado and not the more comprehensive TABOR
limit passed in 1992 by the voters of the state.

message to all officials, even those in states without TELs. The clear outcome of
the early tax revolt was that if officials hoped to avoid the having most restrictive
of fiscal limits placed upon them exogenously, they had better heed the message
of the TEL movement. In this sense, the authors argued that early TELs
universally reduced the size of government regardless of whether a particular state
had a TEL in place or not. Because of the universality of the effect, it is
conceivable that research studies specifically constructed to discern the effects in
the TEL states relative to non-TEL states return inconclusive or insignificant
In another 1983 work, Lowery (1983) studied the effect of state imposed limits on
local governments as a means of evaluating the effectiveness of fiscal cap style
TELs. This research found no significant evidence that such TELs limit the
growth of government, although there was evidence to support the hypothesis that
state imposed limits on local governments reduce the local reliance on the
property tax. Furthermore, this research found weak evidence in support of the
hypothesis that limits force the funding of public programs onto alternative
sources of revenue but no evidence of an expenditure pattern distortion away from
capital and toward operating. In the flurry of research in the immediate wake of
Proposition 13 and the advent of the modem TEL movement, there is a lack of

strong consensus about whether TELs are an effective means of limiting the
growth of government.
Kenyon and Benker (1984) follow up on the other early studies by repeating the
Gold (1983) survey method and supplement their findings with early empirical
data on the growth in state level general fund expenditures for the period 1977-
1983. Although they find no difference in spending between TEL and non-TEL
states, like Shannon and Calkins (1983) they argue for a more subtle
interpretation of the empirical findings. Kenyon and Benker (1984) argue that the
deeper message is not that TELs in and of themselves do not matter, but rather
that the mere existence of such measures in some states actually influences
spending behavior all states, TEL ones as well as non-TEL ones.
It is our contention that whether these initiatives pass or fail is
irrelevant in most cases because they succeed in bringing their
message to lawmakers merely by bringing serious contenders for
adoption. Their message is that government growth should not
exceed state economic growth. State legislators will modify future
spending behavior to keep in accord with what they perceive to be the
desire of the electorate; lawmakers will take immediate action in
hopes of diffusing future citizen-initiated, government-binding
limitations13 (Kenyon and Benker, 1984,444).
13 Interestingly, this is precisely what Colorado lawmakers tried to do with the passage of the Bird-
Arveschoug Amendment in 1990. This measure placed a 6% growth limit on the state general
fund, but was unsuccessful at heading off the more restrictive TABOR Amendment passed by the
voters in 1992.

For Kenyon and Benker, a deeper reading of the empirical findings led them to
the conclusion that TELs are, in fact, effective at limiting the growth of
government and that this effectiveness accrues to all states, regardless of whether
the state has passed TEL language or not.
Merriman (1986) studied the specific case of New Jerseys early fiscal cap TEL
that limited local appropriation growth to 5% over the previous year. Merriman
compared actual spending under the 5% cap to predicted spending in a local
budget unlimited by a TEL for 168 of New Jerseys municipalities. Under his
model, approximately 63% of all municipalities demonstrated a reduction in
actual spending from predicted under the cap. Within Merrimans single state
study, TELs did not prove to be universally effective or ineffective, in some sense
confirming the inconclusive findings of the earlier cross sectional studies.
In a slightly different perspective on the question, Abrams and Dougan (1986)
employed a public choice approach to local budget determination to study the
effect of a myriad of constitutional restraints on the ability of officials to spend
public money. From their model, based on the standard public choice model of

pressure group competition in the budget process, the authors conclude that
[s]tates that have adopted.. .constitutional limits on government spending or
taxes seem to spend at the same levels as those without such provisions, ceteris
paribus' (Abrams and Dougan, 1986, p. 112, emphasis in original).
Howard (1989), Cox and Lowery (1990), and Bails (1990) lend their support to
the proposition that TELs are not effective at limiting the growth in government.
Howard (1989) measured the proportion of personal income dedicated to taxes in
both TEL and non-TEL states for the period 1980 to 1987. Her surprising results
found that, early on, TEL states collected a larger proportion of personal income
in taxes than did non-TEL states. Of course, this seemingly contradictory result
may be explained by arguing that heavy tax burden was a predictor of TELs rather
than a result. Consistent with this interpretation, the trend with respect to tax
burden did begin to reverse in later years, but the inconsistency over the time
period of study as well as the other factors at play in the budgeting process led her
to conclude that [t]he overall condition of state economies and structure of state
tax systems, in combination with the sensitivity of policymakers to anti-tax
sentiment, have done more to limit state spending than have imposed restrictions
(Howard, 1989, p. 83).

Cox and Lowery (1990) employed an interrupted time series design on pairs of
TEL and non-TEL states to explore the effectiveness of and responses to fiscal
caps. Their conclusion, based upon the three pair of states studied was that .the
impact of state fiscal caps in their first decade of operation.. .in general yields
little evidence that fiscal caps have had much impact on state finances to date
(Cox and Lowery, 1990, p. 492). Bails (1990), in an update to earlier research
from 1982, confirmed the earlier findings that TELs are not effective in limiting
the growth of government. Again, as with the earlier findings, this research found
that the relatively low percentage of revenues or expenditures covered by
existing TELs appears to provide political decision makers with sufficient tools to
continue expanding the public sector relative to the private sector (Bails, 1990,
237) and that states with limitations have experienced virtually the same growth
[in expenditures] as have those states without limitations (Bails, 1990, 237).
As the evaluation of the modem tax revolt began to mature, the TEL studies
improved in terms of the sophistication of the analytic methods, the availability of
data, and the sensitivity of the results. Cox and Lowerys (1990) study is an
example. So is the work of Joyce and Mullins (1991) who were able to
simultaneously study TELs that affect state government, local government, as
well as combinations of the two, and shed some light onto the seemingly

contradictory previous results. Their research finds differing conclusions
depending upon the level(s) of government affected by the TEL.
TELs imposed on state governments had little or no impact on
increasing reliance on general tax revenue sources. Where both state
and local governments faced limitations, the consequences were
greater for local structures than for the state. States characterized by
local TELs did show short-term overall declines in both state and
local tax levels; in the long term, however, state taxes increased in
those states (Joyce and Mullins, 1991, 240).
Preston and Ichniowski (1991) also took advantage of the availability of better
data and methods to revisit the earlier studies concerning the effectiveness of
TELs. They replaced the more common cross-sectional analysis with a first
difference time series model. In studying property taxes only, Preston and
Ichniowski concluded that [rjesults from the first difference models reveal that
the magnitude of the reduction in property tax revenue growth due to state
limitations is often underestimated by simpler cross-section models (Preston and
Ichniowski, 1991, 123). Their revisit of the earlier studies provided some
evidence to counter some of the earlier conclusions that TELs are not effective in
limiting the growth in government. In further support, Poterba and Reuben
(1995) found that, at least as it related to the growth in compensation of public
sector employees, TELs were effective limits.

The TELs matter proposition was further supported by Dye and McGuire
(1997). This research returned to the use of cross-sectional analysis on
municipalities in the state of Illinois. Illinois provided an opportunity to study the
effect of TELs at the local level because Illinois passed property tax limitations
that affected only a subset of the states municipalities. Under the unique
circumstance in Illinois, Dye and McGuire found that ...the cap has been
effective in that fiscal behavior of capped jurisdictions differs from that of never-
capped jurisdictions (Dye and McGuire, 1997, 469) and that ...the cap has had
a restraining effect on the growth of property taxes (Dye and McGuire, 1997,
Finally, Pouslon and Kaplan (1994) argued that the previous ambiguous findings
regarding the effectiveness of TELs are victim of the incorrect theoretical lens.
Instead of the traditional Leviathan model applied to the study of taxation and
TELs (Brennan and Buchanan, 1980), Poulson and Kaplan (1994) argued for a
rent-seeking model. Under this model, the initiation of the TEL and its
subsequent policy response was modeled as a give and take between the taxpayer
advocacy groups behind the implementation of the TEL and the rent-seeking
groups purported to be the recipients of government programs and income

redistribution programs. Under this rent-seeking model, the TEL is effective in its
early years as it operates in its original design as conceived by the taxpayer
advocacy group. However, as rent-seeking groups are able to mobilize and
influence policy, the TEL is ultimately undermined to provide for the programs
sacred to such groups. Under this model, TELs are hypothesized to be effective
in the early years and less effective later on as the language of the TEL is
modified or undermined. Empirical evidence only slightly supports this
hypothesis, with 5 of the 22 states studied by Poulson and Kaplan (1994)
demonstrating such a pattern of effectiveness.
In a later study employing more sophisticated econometric methods, Shadbegian
(1998) analyzed panel data for the years 1972-1992 to explore the question of
whether TELs mostly targeted at the property tax levy have been effective in
limiting the growth of government. His findings supported the hypotheses that
TELs limit both the level and growth of local government expenditures and, not
surprisingly in the context of this research design, that TELs aimed at limiting
property tax levies do limit the growth of property taxes.
Twenty years of research on the issue of the effectiveness of TELs failed to
provide a consensus. Of the works reviewed here, the authors are almost evenly

split into three camps, TELs matter, TELs do not matter, and mixed findings on
the effectiveness of TELs. Table 1 summarizes the positions of the research into
the intended consequences of TELs.
Table 1: Do TELs matter in limiting the growth of government?
TELs Do Matter TELs Do Not Matter Mixed Results
AC1R (1977) Inman (1979) Ladd (1978)
Shannon and Calkins (1983) Bails (1982, 1990) Gold (1983)
Kenyon and Benker (1984) Lowery (1983) Merriman (1986)
Preston and Ichniowski (1991) Abrams and Dougan (1986) Joyce and Mullins (1991)
Dye and McGuire (1997) Howard (1989) Poulson and Kaplan (1994)
Shadbegian (1998) Cox and Lowery (1990)
Poterba and Reuben (1995)
For the most part, the pre-1990s literature considering the effectiveness of TELs
was silent on the apparent contradictions within. Although the authors
acknowledged the debate on the issue, none sought an explanation for the mixed
results demonstrated in the literature. By the mid-1990s, authors (Elder, 1992;
Stansel, 1994) began to more deeply probe the question of why some authors
found TELs to be effective while others found the opposite. Finally, there began

to emerge an answer to the question of whether TELs were effective in limiting
the growth of government and the answer was it depends. More specifically,
[t]he results ... indicate that the form of the constraint is important... (Elder,
1992, 47, emphasis added).
Not all TELs are equal, and per Elder (1992) and Simmons (1999), structure does
matter. In general, TELs may be differentiated according to their treatment of
the following six characteristics (Stansel, 1994; Sepp, 1999):
Whether the limit is constitutional or statutory
The method of approving the limit
The factor by which the TEL allows government to grow
Whether the limit applies to revenues, expenditures, or both
The treatment of surplus revenues
The provision for overriding the limit
In addition, many states laws require other than a simple majority of the
legislature for tax increases. In some states, these supermajority requirements are
provisions of the TEL while in others the supermajority requirement is a separate
stand-alone one.

There is a nearly unanimous consensus in the literature concerning the relative
restrictiveness of particular provisions of TELs (New, 2003; Stansel, 1994; Sepp,
1999; Joyce and Mullins, 1996; Shadbegian, 1999). In addition, there is an
emerging consensus that the restrictiveness and effectiveness are correlated,
particularly as it relates to the growth rate of public sector wages (Poterba and
Reuben, 1995), thus clarifying the seemingly contradictory findings in the
literature on the intended consequences of TELs. This clarification leads to the
second hypothesis to be tested by this dissertation.
Hi'- TELs that are structured in a manner that most effectively restricts the growth of
government are also the most restrictive in allowing for reform of a states tax code.
Colorados fiscal cap TEL, the TABOR Amendment, treats each of the six
elements listed above in the most restrictive of manners. In addition, it contains
the requirement that citizens approve any tax increase, the most restrictive of all
the supermajority requirements. In fact, it is considered the most restrictive TEL
in the nation (Martell and Teske, 2007). It is probably not a coincidence that tax
reform has been an elusive concept for the state since Colorados TEL passed in
1992. While Colorados TEL has been considered successful in limiting the
growth of government (Sepp, 1999), the empirical evidence suggests that it has

also had the unintended consequence of precluding any significant reform to the
states tax code, particularly as it relates to the reform of the business personal
property tax (Martell and Teske, 2007).
The empirical evidence from Colorado may be paired with other empirical work
on limits to government nationwide. Poterba (1994) found that the magnitude of
tax increases in TEL states is less than half that in non-TEL states when states are
seeking to reform their tax codes and revenue systems in response to a budget
deficit. This finding led to the conclusion that TELs make raising taxes more
difficult... (Simmons, 1999, 89) and, addressing the concern that government
overreaches with its authority to tax, [w]hat is left for those who truly want to
change the tax...habits of government is to change the rules (Simmons, 1999,
91). In the context of the tax revolt, changing the rules has meant TELs.
However, TELs are not without their unintended consequences. While this
dissertation further hypothesizes and tests propositions related to the unintended
consequences of TELs with respect to tax reform, earlier literature suggests that
one constant with respect to TELs is that unintended consequences often do
result. The final section of this review turns to the literature on unintended

TELs: The Unintended Consequences
As with most policy, the unintended consequences are only recognized in
retrospect. While TELs were designed as a fiscal institution intended to limit the
growth of government, they too have been demonstrated to inflict unintended
distortions on fiscal policymaking in the jurisdictions in which they are
implemented. The most documented of these unintended effects have been on
educational performance, but other demonstrated effects include the shifting of
public funding away from taxes and onto user fees and the transfer of
responsibility for service provision to other, generally unlimited, levels of
government. While none of these unintended effects is terribly surprising, they
were, presumably, unintended. The ample evidence on unintended effects
suggests that others may be occurring as well, lending support to the research
hypotheses relating TELs to tax reform posed earlier. The last sections of this
literature review briefly summarize the literature on the unintended consequences
of TELs as a fiscal institution.

TELs and Education
The majority of the work on the unintended consequences of TELs is in the area
of education. While the broader body of the unintended consequences literature
supports the notion that TELs do carry with them unintended consequences, in the
area of education, the evidence is mixed. Figlio (1997 and 1998), in national and
Oregon specific studies, respectively, finds strong evidence for an increase in
student teacher ratios and weak evidence for increased administrative spending
relative to instructional spending in states with TELs. In a later work, Figlio and
Reuben (2001) find that tax and spending limits reduce the average quality of
college majors in education in the states that employ such fiscal constraints. This
result is presented as explanation for earlier findings that post Proposition 13 era
tax limits had adverse effects on student educational performance (Figlio and
Reuben, 2001). Shadbegian (2003) also demonstrates, although with a weaker
correlation, the relationship between TELs and increases in student teacher ratios.
Flowever, in the area of education, the evidence on the unintended effect of TELs
is not unanimous. As potential support that unintended consequences do not
always occur, or that they may be effectively ameliorated, Downes, Dye and
McGuire (1998) find only limited evidence for the relationship between TELs and

student performance. This is consistent with an earlier finding that student
performance is sustained in the presence of TELs as districts facing limits shift
funding toward instruction at the expense of other school activities (Dye and
McGuire, 1997). Although this sort of funding shift achieves one purpose, that of
maintaining student performance, it also is evidence of a second class of
unintended consequences of TELs, the shifting of funding within an institution.
In the section that follows, other funding shifts are examined as a separate class of
unintended consequences of TELs.
TELs and the Shifting of Funding Responsibility
The exploration of TELs and their impact on educational outcomes suggested a
shift in funding proprieties within a school district. For other levels of
government operating under such limits, the unintended funding shifts are
generally between levels of government or between funding sources. In both
instances, the intent of the TEL was not to induce such shifts but rather to shrink
the size and scope of government.
In one of the earliest studies of the unintended effects of expenditure limits,
Bennett and DiLorenzo (1982) documented the shift to off budget expenditures

through the establishment of authorities independent of the limited unit of
government. One of the perverse consequences of measures to limit the growth of
existing governmental units was the establishment of more units of government.
Later, as TELs limited both revenues and expenditures, the funding shifts were
more subtle.
Ried (1998) explored funding shifts in post Proposition 13 California and found
evidence for both a shift to alternative sources of revenue to the limited property
tax and for a shift in the responsibility for the funding of schools away from local
and toward the state government. A year later, in a 49 state study, Skidmore
(1999) confirmed the shift to both unrestricted sources of revenue and levels of
government. Both Galles and Sexton (1998) and Shadbegian (1999) supported
the conclusions that TELs result in a shift to unrestricted sources of revenue. In
the presence of TELs, which most often limited taxes but not fees, government in
limited states increasingly became a user pay exercise.
Conclusion: TELs and Their Consequences
The findings in this area of the TEL literature are as varied as the subject matters.
However, a strong conclusion from this body of research is that TELs often do