The Role of Fiscal and Political Institutions in Limiting the Size of State Government

In many states, tax and expenditure limits constrain government spending. All but one state have adopted balanced-budget rules. Some governors have the power to veto individual budget items (the so-called line-item veto). This article reviews the evidence linking fiscal and political institutions to state taxation, spending, and debt. It appears that properly designed fiscal and political institutions are effective in containing the growth of state government. Constitutional tax and expenditure limits have been more successful than spending constraints established legislatively. Balanced-budget rules that prohibit deficit carryover to the following fiscal year are superior to rules that allow deficit carryover. Researchers have identified two other relationships. First, there is evidence that fiscal rules reduce state borrowing costs. Second, the citizen initiative process has played a role in controlling spending: states with a citizen initiative process spend less.