Steven Deller (Department of Agricultural and Applied Economics, University of Wisconsin – Madison) & Judith I. Stallmann (Community Development Extension, Agricultural Economics, Rural Sociology and Public Affairs, University of Missouri – Columbia) have published Tax and Expenditure Limitations and Economic Growth, 90 Marq. L. Rev. 497 (2007).  Here is the Conclusion:

This study has provided an overview of the tax and expenditure limitations movement on both local and state governments. There is a long history of TELs on local government, while the movement to impose them at the state level is more recent. Nearly all states have some form of TELs on local governments. For this reason, the research on TELs focuses on local governments. The research can be broken into three categories: fiscal impacts of TELs, impacts of TELs on local government processes, and impacts of TELs on economic growth. While there is a large amount of literature on the impact of taxes on economic growth, it is still inconclusive. In part, the impact of taxes on economic growth may be changing over time. Tax differentials might also have a larger impact in a small area, when there are few other differences in costs for firms to respond. We could find only two studies that address the impact of TELs on economic growth. One focuses on local TELs and their impacts on local public sector wages compared with private wages. The second limits its focus to Colorado and the western states. Thus, our study is the first to take a broad look at the impact of both local- and state-level TELs on growth in state per capita income.

• While Wisconsin has historically been a high tax state, in terms of expenditures, it does not appear to be out of line. Wisconsin’s progressive political philosophy results in a dependence on taxes as opposed to alternative sources of revenue, such as fees and charges.
• Correlation analysis finds that there are no “low tax-high income” states.
• Growth in the public sector is a natural byproduct of overall economic growth. Simple correlations indicate that the public sector grows more slowly than the overall economy. Wisconsin fits this pattern.
• Employment in the Wisconsin public sector does not appear to be out of line with respect to other states.
• TELs imposed on local governments may have a negative impact on the growth of per capita income in the short run. They do not appear to affect economic growth in the longer run. On the other hand, TELs imposed on state governments may have a positive impact on economic growth. A possible explanation may be that the public services that matter most to the economy are provided by local and not state governments.

This study should be viewed as one step forward in understanding the implications of the size of government and TELs on economic activity and growth. What we lack is a clear theoretical framework to phrase our questions and craft the empirical work. As we have reviewed, the literature is not wanting for theoretical arguments, but there lacks a unifying framework to rigorously test our central hypotheses. Part of the challenge is that the framework is not purely economic or political, but rather it needs to be interdisciplinary. One could even argue that sociology has something to bring to the table in terms of the notion of “group think.” As noted by many in the literature, some of these TEL movements take on a life of their own.

In addition to trying to think through a more comprehensive framework to think about TELs and economic growth, we also need to refine our thinking about how we empirically measure TELs. Since every state is different, our simple dummy variables are a gross generalization. Our challenge is how we model such complexities into an economic growth framework. Then, how is it operationalized for empirical analysis? We believe that this fundamental problem is why the vast majority of academic studies that are available tend to focus on individual states in an almost case-study structure. But in order to draw general inferences, we must move beyond these case studies. We believe that this study is a step in that direction.