At least 30 states, including Connecticut, Maine, Massachusetts, and Rhode Island, operate under “tax and expenditure limitations” (TELs): formula-based budgeting requirements that apply specific limits to expenditures, appropriations, or revenue collections by state or local government. More than a dozen states considered TELs in 2006. Legislation proposing a new TEL to further limit General Fund appropriations in Rhode Island was introduced; Maine citizens will vote on a more restrictive TEL this November.

Several factors, including a desire for lower taxes and a belief that additional measures are needed to keep government spending in check, drive this interest in TELs. This paper discusses such arguments. It also examines how TELs affect state budgets, in part through a simulation of the impacts of current or proposed TELs in Maine and Rhode Island. The general finding is that while TELs can limit the growth in state budgets, the actual relationship between TELs, tax burdens, and state economic competitiveness is more complex than can be captured by any single budgetary formula. Determining whether government, at whatever level, is too big or is growing too fast is a contentious issue. Setting an optimal rate of governmental growth is similarly fraught with challenges. After all, one person’s wasteful program is another’s essential service. Even many voters who support TELs do so out of a desire to enhance governmental efficiency, not to reduce the level of public services. But even the best-written TELs cannot guarantee that governments will respond to formal fiscal restraints by maximizing efficiency before cutting service levels.

Because they tend to be arbitrary, TELs can sometimes weaken the ability of state and local governments to respond to changing conditions and challenges, from natural disasters to unanticipated infrastructure or human service needs. Just as policy makers should be responsive to constituent concerns about spending and taxes, they must also consider the possibility of unintended consequences from a TEL. They must balance theory with careful attention to a TEL’s specific language and details.