Policy Analysis No. 420

Limiting Government through Direct Democracy: The Case of State Tax and Expenditure Limitations

Executive Summary

Defenders of individual freedom and limited government have often favored representative government over direct democracy. Since 1978, however, activists have proposed and passed initiatives limiting taxing and spending by state governments in the United States. State legislatures have occasionally imposed tax and expenditure limitations (TELs) on themselves.

TELs passed by initiative are more restrictive and contain fewer loopholes than those enacted by state legislatures. Regression analysis of a comprehensive data set of state government spending shows that TELs enacted by citizen initiatives cause per capita public spending to decrease; TELs enacted by state legislatures are associated with an increase in government expenditures.

Some TELs are more effective at limiting government than others. TELs that limit government spending to the inflation rate plus population growth and mandate immediate rebates of government surpluses are more effective at limiting government outlays than are other TELs.

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Michael J. New, a Ph.D. candidate at Stanford University, was a data analyst and research assistant at the Cato Institute in 2001.