Presentation at 2016 NTA

1. Short-Run and Long-Run Fiscal Effects of
Supermajority Rule to Raise Taxes
Soomi Lee
University of La Verne
November 12, 2017
National Tax Association Conference
Baltimore, MD

2. Supermajority Vote Requirements to Raise
Taxes in State Constitutions
• A procedural rule to limit legislative taxing power.
• Require a supermajority to raise taxes instead of a
simple majority.
• Sixteen states are currently under the requirement
(details vary): AZ, AR, CA, CO, DE, FL, KY, LA,
MI, MS, MO, NV, OK, OR, SD, WA.
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3. Pros and Cons
• Proponents: the rules promote fiscal discipline by
increasing political cost of a winning coalition
(Brennan and Buchanan 1977, 1979)
• Opponents: the rules do not work. Fiscally
conservative states will abide by the rule; states
that tax and spend more will circumvent the rule
regardless of the presence of the rule (Poterba
1994).
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4. Literature on Their Effectiveness
• Earlier studies: Yes, they reduce taxes.
– Knight (2000): Beasley and Case (2003)
• Recent studies: conflicting with earlier results
– Bradbury and Johnson (2006); Lee et. al
(2014); Heckelman and Dougherty (2010)
• Some studies show that it works in the short run.
– Lee (2014); McCubbins and McCubbins (2010)
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5. How Do State Governments Cope with
Supermajority Rules to Raise Taxes?
• Possible state actions
1. Circumvent the rule
2. Raise taxes by legislative
supermajority/referenda
3. Undermine the rule
4

6. 1. Circumvention
(Kiewiet and Szakaly 1996)
• Both opponents and supporters claim this.
• Raise taxes and fees/surcharges that are not subject to
the supermajority rule
– CA Proposition 26, ”Stop Hidden Taxes” (2010)
– Most supermajority states impose the rule on fees too.
• State-enterprise exemptions
– California Chamber of Commerce, et al. v. California Air
Resources Board, 2013. (green house gas allowances)
– TABOR Foundation v. Colorado Bridge Enterprise, 2014.
(bridge safety surcharge)
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7. 2. Do not circumvent
• Increase taxes through initiatives and
referendum
– Often temporary and renewed multiple times
– Nevada: a temporary increase in sales tax in
2009 was renewed three times.
– California: a state income tax increase
Proposition 30 (2012). Prop 55 (2016).
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8. 3. Undermine the rule
• Nevada
– Guinn v. Legislature of Nev. (2002)
• Washington
– Legislative tampering (2001, renewed twice)
– League of Education Voters v. Washington State
(2013, the court ruled that the supermajority rule is
unconstitutional under the state constitution)
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9. Empirical Test
• Time-varying effects.
• The circumvent hypothesis.
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10. Empirical Challenges: Endogeneity
• Unobserved variables may affect states’ propensity
towards the rule adoption, which cause biased
estimates.
• Previous studies use fixed effect estimators
with/without instrumental variables such as an
availability of initiative process for a constitutional
amendment.
• Reasoning: if it is easier to change the state
constitution states will be more likely to adopt the
supermajority rules. And the existence of initiative
process will not be associated with taxes.
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11. Unreliable IV Approach?
1. The initiative is likely to influence fiscal outcomes
through mechanisms other than the supermajority
requirements.
2. No tests for the validity of the instruments in
existing literature.
3. States have had their own fiscal preferences even
long before they allowed initiative processes in
their state constitutions (Berry 2014) . This might
violate the parallel trend assumption.
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12. New Approach
• Introducing state-by-year fixed effects
yit = β1Dit + β2Sit + β3𝑆"#
$
+ λX + αi + δt + ψiT + εit
• D: dummy variable (1=existence of the rule)
• S: # years passed after the rule adoption
• αi : state fixed effect
• δt : time fixed effect
• ψiT : state-by-year fixed effect
• εit: : idiosyncratic error term
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13. Data and Variables
• State-level yearly panel data with 46 states
from 1960 to 2008.
• Dependent variables:
– Tax burden (per $1,000 personal income)
– Growth of tax burden
– Fee burden (per $1,000 personal income)
– Tax to fee ratio
• Key independent variables:
– # years passed after the rule adoption
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14. • Population (log)
• Per capita income ($2010 thousands)
• Dependency ratio
• Governor’s party affiliation
• % Democrats in the lower house;
• % Democrats in the upper house
• Citizen ideology; Government ideology
• Divided government (dummy)
• Existence of expenditure limits
• Presence of legislative term limit
Control Variables
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15. Effects of Supermajority Rule on
Tax Burden ($ amount tax per $1,000 personal income)
(1) (2)
Supermajority rule
(dummy variable)
-4.887* -.598
(2.032) (1.444)
State-specific time trend No Yes
Control Variables No No
N 2254 2254
Adj.R-sq .412 .63
Notes: Fixed-effects models are used. Robust standard errors are
in parenthesis. State fixed effect and time fixed effect included in
all models. *p<.05.
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16. Effects of Supermajority Rule on
Tax Burden ($ amount tax per $1,000 personal income)
(1) (2) (3) (4)
Supermajority rule
(dummy variable)
-1.314 2.468* .702 2.843*
(1.059) (1.120) (1.019) (1.290)
#Years
-.488 -.456* -.680* -.482*
(.299) (.210) (.298) (.233)
#Years2 .009 .021* .017* .022*
(.006) (.010) (.008) (.010)
State-specific time trends No Yes No Yes
Control Variables No No Yes Yes
N 2254 2254 2254 2254
Adj.R-sq .412 .63 .419 .63
Notes: Fixed-effects models are used. Robust standard errors are in
parenthesis. State fixed effect and time fixed effect included in all
models. *p<.05.
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17. Effects of Supermajority Rule on
Tax Burden ($ amount tax per $1,000 personal income)
(1) (2) (3) (4)
Supermajority rule
(dummy variable)
-1.314 2.468* .702 2.843*
(1.059) (1.120) (1.019) (1.290)
#Years
-.488 -.456* -.680* -.482*
(.299) (.210) (.298) (.233)
#Years2 .009 .021* .017* .022*
(.006) (.010) (.008) (.010)
State-specific time trends No Yes No Yes
Control Variables No No Yes Yes
N 2254 2254 2254 2254
Adj.R-sq .412 .63 .419 .63
Notes: Fixed-effects models are used. Robust standard errors are in
parenthesis. State fixed effect and time fixed effect included in all
models. *p<.05.
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18. Effects of Supermajority Rule on
Tax Burden ($ amount tax per $1,000 personal income)
(1) (2) (3) (4)
Supermajority rule
(dummy variable)
-1.314 2.468* .702 2.843*
(1.059) (1.120) (1.019) (1.290)
#Years
-.488 -.456* -.680* -.482*
(.299) (.210) (.298) (.233)
#Years2 .009 .021* .017* .022*
(.006) (.010) (.008) (.010)
State-specific time trends No Yes No Yes
Control Variables No No Yes Yes
N 2254 2254 2254 2254
Adj.R-sq .412 .63 .419 .63
Notes: Fixed-effects models are used. Robust standard errors are in
parenthesis. State fixed effect and time fixed effect included in all
models. *p<.05.
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19. 18
-10
-5
0
5
10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
# Year since adoption
90% lower
Point estimate
90% upper
Time Effects after Adoption on Total Effective Tax Rates

20. Effects of Supermajority Rule on
Growth of Tax Burden
(1) (2) (3)
Supermajority rule
(dummy variable)
-.924 -.755 -.591
(.567) (.575) (.722)
Years
(# years passed after adoption)
-.129* -.158*
(.042) (.060)
Years2 .001
(.002)
State by Year Fixed Effects Yes Yes Yes
Control Variables Yes Yes Yes
N 2208 2208 2208
Adj. R-sq .184 .184 .184
Notes: Fixed-effects models are used. Robust standard errors are in
parenthesis. State fixed effect and time fixed effect included in all
models. *p<.05.
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21. Effects of Supermajority Rule on
Fee Burden (per $1,000 personal income)
(1) (2) (3)
Supermajority rule
(dummy variable)
.538 .532 .145
(.436) (.456) (.677)
Years
(# years passed after adoption)
.005 .071
(.063) (.097)
Years2 -.003
(.003)
Control variables Yes Yes Yes
Year dummy variables Yes Yes Yes
N 2208 2208 2208
Adj. R-sq .788 .787 .788
Notes: Fixed-effects models are used. Robust standard errors are
in parenthesis. *p<.05.
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22. Effects of Supermajority Rule on
Tax to Fee Ratio
(1) (2) (3)
Supermajority rule
(dummy variable)
-.745 -.765 -.135
(.528) (.507) (.563)
Years
(# years passed after adoption)
.015 -.093
(.054) (.067)
Years2 .004
(.002)
Control variables Yes Yes Yes
Year dummy variables Yes Yes Yes
N 2256 2256 2208
Adj. R-sq .618 .618 .623
Notes: Fixed-effects models are used. Robust standard errors are in
parenthesis. *p<.05.
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23. Conclusion
1. The rules increase the level of tax burdens after
the rule adoption. There are statistically
significant but substantially small time-varying
effects.
2. The rules slow down the growth of tax burden.
3. The conjectured legislative circumventing
behavior is not supported.
4. The long-term practicality of the supermajority
vote requirements for tax increases remains
unclear.
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24. Thank you.
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25. Effect of Supermajority Rule on Tax Burden (per $100 personal income)
CA vs. Synthetic Control Unit
(Lee 2014)
Circumvention?
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26. 5
10
15
Fees
and
charges
Per
$1,000
personal
income
1960 1970 1980 1990 2000 2010
Supermajority states Non-supermajority states
Trend of Fee Burdens by Supermajority
Status: 1960-2008
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