Association for Public Policy Analysis & Management

In the United States, regional variations in institutional arrangements provide a fertile ground for practitioners and researchers to study the intended and unintended effects of different fiscal institutions. Previous research has focused on numerical fiscal rules, such as tax and expenditure limits, deficits rules, and balanced budget requirements. This paper shifts attention to the effects of supermajority requirements for tax increases on the borrowing costs of state governments, an issue that has been ignored in previous studies. The paper focuses on the impact of supermajority requirements on credit ratings and true interest cost of states’ general obligation debt. Using a combination of generalized ordered logit and linear regression analysis on a sample of G.O. bonds issued by American state governments between 2001 and 2014, the paper finds that states with supermajority voting requirements are more likely to receive a lower credit rating on their bonds. Furthermore, on average, the states with a supermajority voting requirement pay a premium of 12 to 18 basis points in true interest cost for their bonds. States that are considering adopting supermajority requirements should consider the unintended effects in terms of lower credit ratings and higher borrowing costs while adopting or designing such fiscal rules.