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COMMENTS: Voter Preferences for Capital and Debt Spending: Evidence from State DebtReferendaAuthor(s): Brian KnightSource: Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting ofthe National Tax Association, Vol. 91 (1998), p. 134Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/41954590 .

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COMMENTS

Voter Preferences for Capital and Debt Spending: Evidence from State Debt Referenda

Brian Knight , University of Wisconsin-Madison

In voter spending

this preferences paper,

category,

Leslie

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government evidence from

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state by voter preferences for government debt by

spending category, using evidence from state debt referenda results between 1968 and 1988. The author finds that the spending category is an impor- tant determinant of referenda success. These results suggest that state governments with referenda re- quirements may have higher spending in more popu- lar categories and lower spending in less popular categories. I found the paper interesting, especially in its use of a newly available data set on state refer- enda. My comments address four issues: sample se- lection problems, the interpretation of the spending category coefficients, the statistical insignificance of spending category variables, and the interest rate for tax-exempt bonds as an important omitted variable.

First, the observations are exclusively from states with referendum requirements. Given that state vot- ers, or their elected officials, chose to adopt these requirements, the observations are a selected sample of referenda, rather than a random sample. To the extent that states with referendum requirements have preferences that differ from non-referendum states, the preferences measured in the analysis will not be nationally representative. To address this selection problem, the author tests for differences between the five states with a large number of referenda and the 20 states with only a small number of referenda. The states (except Maine) that have a large number of referenda are found to have preferences across spending categories similar to the states with a small number of referenda. However, this test, compar- ing states with a small and large number of refer- enda, does not necessarily address differences in preferences across spending categories between states with and without referenda requirements.

Second, the author needs to investigate more fully and discuss the pattern of coefficients on the spending categories. This discussion should include a framework for explaining differences in popu- larity across these categories. For example, one may expect spending categories with more widely dis-

persed benefits to be more popular than redistribu- tive categories, those with concentrated benefits. This reasoning would explain the lack of popular- ity for government administration, a category that provides concentrated benefits to government em- ployees. However, veterans spending, measured as the most popular category, also provides concen- trated benefits at the expense of all voters.

Third, while the spending category variables are jointly significant, only five of these 18 variables are marginally significant at the 95 percent level. This may reflect the relatively small number of ob- servations for some spending categories. For ex- ample, the Toll Highways and Welfare Institutions categories each comprise only one percent of the 455 observations. To address this small sample prob- lem, the author could reduce the number of spend- ing area variables by combining categories. For example, Water Transport and Terminals, Regular Highways, and Toll Highways could be combined into a single Transportation category.

Fourth, the interest rate, the cost of debt financ- ing relative to tax financing, is a potentially impor- tant omitted variable. The author hypothesizes that voter approval requirements may send a positive sig- nal of public support for the project to the bond mar- ket. This positive signal should lead to a better bond rating, a lower interest rate, and thus increased voter support. Also, there have been significant changes in the market for tax-exempt debt over the 1968 to 1988 sample period. For example, the Tax Reform Act of 1986 reduced marginal tax rates, especially for high-income individuals, the group most likely to hold tax-exempt debt. A reduction in marginal tax rates makes tax-exempt bonds less attractive, rela- tive to taxable bonds, thereby lowering demand for tax-exempt debt and raising its interest rate. To ad- dress this issue, the author could control for the tax- exempt bond interest rate for each state in each year. Alternatively, the author could include year fixed effects to control for national changes over the sample period in the market for tax-exempt bonds.

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