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Abstract

Tax and expenditure limitations (TEL) on state and local governments have been passed with the presumption they will limit the growth of government, raise government efficiency, and increase direct democracy by requiring voter approval of tax increases. Both the popular press and the academic literature focus on the impacts of TEL on state budgets. Yet at a time when decentralization and devolution are increasing demands on local government, TEL provisions are in some cases causing rigidity in local budgets and subsequent fiscal stress. The smaller the budget, the more significant the potential adverse effects of TEL, and small governments tend to be rural governments. While there is some evidence that governments under TEL become more efficient, governments typically look for ways to circumvent the restrictions as they become more severe, increasing inefficiencies and reducing both representative and direct democracy, the opposite of the intended effects of TEL laws. States would be wise to avoid TEL and instead utilize stricter reporting and auditing requirements. The latter are a more direct means of monitoring public sector management while allowing local governments the flexibility to adjust to local fiscal circumstances

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