Is There a Relationship between TELs and Default? Evidence from US Municipalities

The economic effects of tax and expenditure limits (TELs) have been often studied in the literature. However, little research has addressed how TELs might influence the propensity for a jurisdiction to default on its obligations. This study specifically fills that void. Overall, the results indicate that while the likelihood of default increases as TELs become more restrictive, the magnitude is not particularly large. Once decomposed, it would appear that property tax limits increase the likelihood, while expenditure limits have the opposite effect, though the latter result is insignificant. The findings are robust to a number of specifications and provide potential policy implications.