That overcomes the inequality-depoliticization cycle. Increasing state-level fiscal redistribution is key.

Political scientists concur with international trade economists who argue that institutional structures, rules, and policies matter. While multicountry studies may explain how national policies affect crosscountry differences in income inequality, they do not help us understand how national policies affect within-country income inequality. Hatch and Rigby (2015) note there is significant heterogeneity in U.S. states’ fiscal policies—taxation and expenditures—and other. laws, including labor laws such as right to work Kelly and Witko (2012) find that state policy, such as state minimum wage laws, plays an important role in reducing income inequality, and Franko and Witco (2017) find that state laws that weaken unions also increase income inequality. Langer (2001) finds states that adopt more demandside economic development policies, such as investment in education and research and development, as opposed to more traditional supply-side policies, such as tax incentives, show reductions in income inequality. Solt (2008) finds that as inequality rises those in the lower-income categories become disengaged from the political process leading to a cycle where greater income inequality results in greater political inequality thus reinforcing policies that may favor the wealthy at the expense of the poorer. This latter result is largely reaffirmed by Kelly and Enns (2010: p855) who find “economic inequality is, in fact, self-reinforcing” through policy actions. As Hayes and Medina Vidal (2015) discuss, there is political response bias in favor of the wealthier, which also reinforces inequality.

Newman et al. (2015) talk in terms of how income inequality can influence public policies in terms of redistributive and inequality democracy perspectives. Here, the former argues that democratic processes create the potential for addressing inequality that is generated by economic forces. The bulk of the electorate will vote in their own economic self-interested and pursue policies that promote redistribution. Unequal democracies take a grimmer perspective in that higher-income voters have a disproportionate influence on economic policies to the detriment of lower- and middle-income voters. Gilens (2005, p778) in a study of voting behavior across different income levels finds “…that when Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of the poor or middle-income Americans.”

Tax and expenditure limitations (TELs) are one subnational policy that may have impacts on income distribution. By their design, TELs limit the flexibility of states (and local governments) in terms of fiscal policy and widely set the tone of how the state thinks about its role in economic growth and development policies, including policies for addressing rising income inequality. As noted by Joyce and Mullins (1991), Mullins and Wallin (2004) and Stallmann (2007), TELs have been justified for a multitude of reasons, but the most common is to impose discipline to restrain Niskanen–Buchanan– Tullock or Leviathan-type government. Due to the lack of competitive market forces, elected officials lack the discipline to impose fiscal restraint. Rather they respond to political pressures from special interest groups and bureaucrats to increase program budgets, resulting in taxes or revenues and expenditures that exceed efficient levels (Fraser, 2005; New & Slivinski, 2005). Thus, a constraint, such as a TEL, is required to force said fiscal discipline. It is argued that TELs “curb the perceived excess associated with a piecemeal budgetary process which yields …larger expenditures than a majority of voters deem desirable” (Abrams & Dougan, 1986, pg. 105).

As noted by Stallmann, Maher, Deller, and Park (2017) there are two sets of literature on the outcomes of TELs. One literature examines whether the TELs yield the outcomes for which they were intended, and the second literature examines unintended outcomes. One type of unintended outcomes is perverse outcomes—opposite of the intended while a second type of unintended outcome is an outcome that was not contemplated at the time. In the case of TELs, such an unintended outcome may be income inequality due to the restraints the TEL places on state governments to act. Almeida (2020) discusses the increase in inequality after the 2008 recession when transfer programs were phased out. This suggests that if TELs restrict budget flexibility to provide transfer programs, inequality may increase.

The literature addresses a wide variety of the intended outcomes of TELs and whether they were achieved. One area of the literature examines the impacts of TELs on how state and local governments conduct business (e.g., Joyce & Mullins, 1991; Mullins & Joyce, 1996; Shadbegian, 1996, 1998, 1999; Skidmore, 1999); government performance, especially in public schools (e.g., Downes, Dye, & McGuire, 1998; Figlio & Rueben, 2001; Shadbegian, 2003); and fiscal outcomes (e.g., Maher & Deller, 2012; Amiel, Deller, Stallmann, & Maher, 2014). While one should take care in drawing broad generalizations from a complex literature, researchers generally conclude that tax and expenditure limitations alter government behavior but not necessarily in the ways envisioned by TEL proponents.