The economic potential of any system is not only driven by the presence of natural and/or developed capital, but also the institutions that govern the exploitation of these valuable assets. In this sense, the term economic potential is misleadingly incomplete. The mechanism that drives resource allocation is a function of both the distribution of purely economic value and the feasible range of activities governed by political institutions. The goal in institutional design for economic growth, therefore, ought to be the facilitation of those activities that increase the marginal product of value extraction efforts. If the objective is the maximization of economic growth, this broad goal is unlikely to draw many detractors. The devil, however, is in the details.
Among the multitude of policy innovations that have been advanced in service of increasing economic growth, institutional reforms that act on the property tax base have materially altered local government finance for more than a century. As early as the 1880s, these reforms were dominated by efforts to target specific populations via circuit breakers and homestead exemptions. (Bowman 2008) However, starting in large part with the Tax Revolt of the 1970s, more interest has taken root in implementing reforms that target the base in a general way: tax and expenditure limitations. The impact of these and other measures has been noticeable. While property tax revenue remains fairly buoyant with respect to the economy, it has declined in importance, dropping as a percentage of general revenue from 34% to 27% over the 1977-2002 period. (Edwards 2006)
This paper is one component of a larger study seeking to understand the unintended consequences of tax and expenditure limitations. The broad study is a three part empirical examination of the differential impact of tax and expenditure limitations in Colorado (henceforth COTELs) on counties of with different economic foundations. Each section is characterized by exploration of three thematic hypotheses:
The unifying principle across each of these inquiries is the idea that COTELs have constraint levels that vary both cross-sectionally and temporally. This paper explots this variation to explore the extent to which fiscal clustering (measured as fiscal capacity and revenue generation in this context) is driven by this "COTEL intensity" concept.
From a theoretical standpoint, there are two main features of COTELs that would promote fiscal clustering among low-capacity jurisdictions. First, COTELs impose asymmetric pressure on revenue yields over time. The rate of increase is limited by an explicit growth limit, but decreasing yields are not so constrained. Furthermore, once a drop in revenue has been experienced in one year, the baseline is "ratcheted" down because current year allowable revenue is measured against only the previous year's revenue (and not the long term trend). Low revenue years have a disproportionate impact on the long-term revenue capacity of the jurisdiction.
The second impact is related to the first. To the extent that COTELs bias revenue downward (in a manner quite uncoupled with demand projections), it becomes increasingly difficult for constrained jurisdictions to invest in the human and physical capital needed to support robust economic growth. The first effect impacts the revenue generation, while the second impacts the capacity of the economic base itself.
A complicating factor is the existence of spillovers. Both the provision of public goods and the economic vitality of neighboring jurisdictions impact the fiscal and economic capacity of the primary jurisdiction. This externality network has the potential to dynamically reinforce economic growth behavior, whether it be a high or low growth regime. If COTELs exacerbate this effect, there could be undesirable long-term consequences for low capacity counties seeking to create the conditions for economic growth. Insofar as the relationship between COTEL intensity and spatial dependency is evaluated, this paper explores this phenomenon directly.