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states; and vary both in the number and length of terms members may serve, as well as
whether or not they impose lifetime bans on service. The first cohort of legislators were
forced out of office by term limits in 2 states in 1996 and 3 more states in 1998. In the
time period analyzed here, 10 states had term limits in effect.
At first glance, term limits, appear to have had a considerable impact on state
spending and a negligible effect on state tax rates. As Figure 1 shows, the average
growth rate of expenditures in termed states
1
has increased by 53% since the
implementation of term limits. In contrast, the growth rate of expenditures per capita in
untermed states increased by only 11.8% during the same time. Focusing on tax rates,
average income taxes before the implementation of term limits were 1.75% in untermed
states and 1.55% in term states. From 1996 to 2001, average income taxes rose to 2.18%
in untermed states and to 2.01% in term states, a relative increase of 25% and 30%
respectively.
Studies that estimate the effect of fiscal institutions on economic policy must
confront the problem that these institutions are often endogenous. Adoption of budget
rules is not random, but instead may reflect the fiscal preferences of state voters. In the
case of term limits, voters in states with high spending levels and/or high tax rates may be
more likely to adopt term limits in an attempt to impose greater fiscal discipline on their
state legislators. However, this paper argues that term limits can be considered an
exogenous institution. Table 1 ranks the states based on average income tax rates and
expenditures as a share of income from 1990-1994, when a majority of states adopted
term limits. If voters are indeed trying to constrain the fiscal behavior of their
representatives through term limits, then term states should have higher than average tax
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