This article was published on February 19, 2001.
By Martin A. Sullivan
"Congress is the trigger . . . we meet every year." -- Sen. Bob Dole, R-Kan., May 16, 1994
A gimmick. An abdication of responsibility. A gateway to increased complexity and uncertainty. No doubt many members of Congress would view a trigger mechanism that made tax cuts contingent on meeting deficit targets as all of those things. But if the going gets tough for the Bush tax program, a tax trigger may just be what is needed to build a center-right coalition.
So it is not surprising that the idea of a tax trigger is increasingly getting attention from quarters that matter a great deal. First, there is Federal Reserve Board Chairman Alan Greenspan who, for reasons that are not entirely clear, has been able to extend his already-considerable influence beyond monetary policy to tax policy. In his much-ballyhooed January 25 testimony before the Senate Budget Committee, Greenspan made headlines when he endorsed the Bush tax plan after years of opposing tax cuts.
Much less noticed were Greenspan's comments about a trigger mechanism: "Conceivably, [any long-term tax plan] could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied" (emphasis added). Greenspan reiterated his support for a tax cut trigger mechanism at a February 13 meeting of the Senate Banking Committee.
But even Alan Greenspan can't make law. That's where a small but influential group of senators enters the picture. On February 5 a bipartisan gang of five wrote President Bush to express support for the inclusion of a trigger mechanism in any major tax bill. The letter, signed by Sens. Evan Bayh, D-Ind., Arlen Specter, R-Pa., Lincoln D. Chafee, R-R.I., Mary Landrieu, D-La., and Dianne Feinstein, D-Calif., stated: "In our view, such a 'trigger' mechanism offers a safety valve to protect against what many senators fear: a return to deficits should economic conditions -- and budget projections -- change in the years ahead. It acknowledges the uncertainty implicit in 10-year estimates and ensures that we will not return to chronic deficits." (For the letter and related press release, see Doc 2001-3613 (4 original pages); 2001 TNT 25- 24 .)
According to a February 13 press release from Bayh's office, Sen. Olympia J. Snowe, R-Maine, has joined Bayh in efforts to organize a bipartisan coalition supporting a tax trigger. The press release also said that other senators and members of the House of Representatives have indicated their support for the idea. And an article appearing in the February 15 Wall Street Journal reported that Senate Minority Leader Tom Daschle, D-S.D., now supports a tax trigger.
With razor-thin margins separating Republicans and Democrats in both the House and Senate, the swing votes of moderate members are more important than ever. As Snowe -- a self-proclaimed centrist and a member of the Finance and Budget committees has said: "The trigger may be a way of fashioning a consensus." (See also Tax Notes,Feb. 5, 2001, p. 709.)
Of course -- like most everything in Washington -- the idea of a tax trigger is nothing new. In 1996 the Clinton administration proposed a tax trigger as part of its fiscal 1997 budget. Under that trigger mechanism, Clinton's proposed tax cuts for 2000 would have been automatically repealed if the deficit was not at least $20 billion below the Congressional Budget Office's 1996 deficit projection for 2000. At the time, administration officials said the trigger would act as an "insurance policy" in case the CBO projected a less optimistic economic future than it was currently estimating. And in 1998 congressional Democrats proposed their own tax trigger in their alternative to a Republican tax package.
Predictably, the Republican leadership did not like the Democrats' triggers. In 1996 Republican leaders in the House called the Clinton tax trigger "the mother of all gimmicks." Neither the 1996 Clinton trigger nor the 1998 House Democrats' trigger became law.
But then, as now, the idea of triggers had an undeniable appeal to moderates. And once it was out, the Republican leadership could not get the trigger genie back into the bottle. As early as 1998, some moderate Republicans -- like Rep. Fred Upton, R-Mich., a member of a group of House moderates who for the most part initially opposed the GOP effort to include a tax cut in the fiscal 1999 budget -- were attracted to the idea.
By 1999 the trickle of Republican interest in a tax trigger grew into a stream. And seeing the political necessity, the Republican leadership stopped opposing the idea of a trigger. The 10 percent across-the-board rate reduction passed by Congress and vetoed by Clinton in 1999 contained a tax trigger that would have delayed the scheduled reductions in tax rates depending on the level of the federal government's gross interest costs. Under that unique mechanism, for a rate reduction to occur on January 1, the government's gross interest expense during the 12- month period ending July 31 of the previous year could not have increased.
How a New Trigger Would Work
From their letter to President Bush, it appears that the moderate senators want to make any tax increase enacted in 2001 contingent on the budget surpluses in future years meeting the projections set this year. The details are fuzzy, but a good guess is that the mechanics of their plan would operate something like this: At the end of every fiscal year (for example, September 30, 2001), the Treasury Department would tally up total receipts and total expenditures and determine the surplus (excluding social security) for that year. (Because Treasury's financial management service keeps a running tally, figures are available almost immediately.) Treasury then would compare the surplus figure with the figure written into the legislation that the coming year's tax cut is targeted to.
Once the deficit or surplus is known, there are three possibilities. First, the surplus target is met or exceeded so no adjustment to the tax cut is needed. Besides being the happiest outcome, this would also be the simplest outcome.
The second possibility is that the surplus is so small (or the deficit is so large) that the tax cut enacted in 2001 must be suspended. It is not clear in what manner the suspension would end if targets are met in later years. For example, would the phase-in of the tax cut pick up where it left off, or would it jump to the level for that year as laid out in the original legislation? Also, there is no indication of how many years the tax cut would be contingent on the trigger and what would happen to the tax cut at the end of the trigger period.
The third possibility is the most complex. It could happen that the surplus target is not met, but the shortfall is not large enough to justify a complete suspension of the tax cut. That would occur, for example, if the surplus target was, say, $25 billion for fiscal 2003 but the actual surplus turned out to be $5 billion, and the estimated effect on receipts in 2003 of the tax cut enacted in 2001 was $30 billion. In that case, estimated tax benefits would have to be cut back by two-thirds (that is, $20 billion of shortfall divided by $30 billion of tax cuts).
The first thing to notice is that there is nothing Congress can do about the deficit for a fiscal year that has just ended. The best that can be done is an adjustment to the next year's receipts based on the current year's results. Thus, if there is a shortfall in fiscal 2003 that is logged by Treasury on September 30, 2003, then tax return forms and rate schedules mailed out at the end of December 2003 for tax year 2003 must be adjusted so receipts in fiscal 2004 can be increased.
But that creates two practical problems. First, the IRS will have to scramble to get tax forms properly adjusted in time for mailing. The three months from the end of September to the end of December is less time than the IRS would like to modify, print, and distribute more than 100 million tax returns. Second, if taxpayers have not been conservative in their withholdings, they might get socked when they file in the spring of 2004. And if Congress does not make special provisions, there could be massive assessments of penalties and interest for underwithholding on taxpayers who expected -- or just hoped -- that scheduled tax breaks would in fact take effect.
It is possible that using annual deficits as the target for the trigger mechanism could result in some other undesirable outcomes. For example, suppose that for the first four years after enactment of the tax cut, the federal government runs horrendous deficits that greatly increase the federal debt, but in the fifth year luck again turns in the government's favor and the surplus target is met. Should the tax cut be fully effective as if there had been no deficits in prior years? Or suppose the opposite: Four years of bulging surpluses are followed by one bad year. Should the tax cut then be entirely repealed for that year?
This on-again/off-again problem could be remedied by targeting the tax cut to the outstanding stock of government debt rather than the surplus or deficits that change the debt. Because interest costs and debt tend to move together, that is probably what Congress had in mind in 1999 when it chose interest costs (on the stock of government debt) as its triggering mechanism. But the 1999 trigger has its problems too. Interest costs depend on changes in interest rates as well as the outstanding amount of debt. It would defeat the purpose of the trigger if Congress increased spending and fell short of budget projections but escaped the triggered tax increases because interest rates happened to fall.
Whether deficits, debt, or interest costs are targeted, several problems cannot be avoided. For example, the existence of the tax trigger could become a license for opponents of the Bush plan to increase government spending. Suppose there is a $10 billion cutback in scheduled tax cuts because the trigger mechanism indicated the federal government was $10 billion short of its surplus target. It would be possible for Democrats to use this circumstance to fund $10 billion of spending increases without cuts in other government programs or tax increases because the trigger mechanism would provide automatic tax increases that pay for the spending. In that environment, there would be less need for caution on spending because the tax trigger would cushion the budgetary effects of any excess spending.
The problem of providing perverse incentives for government spending could be remedied if instead of targeting deficit, debts, or interest cost, Congress instead targeted tax receipts. By doing that, the link between government spending and the tax trigger would be severed. But this would still give opponents of the Bush plan a free pass on enacting their own tax cuts to replace the Bush plan. Returning to the above example, Congress could enact a $10 billion increase in the earned income tax credit and pay for it with automatically triggered cuts in the Bush plan.
Ghost of Gramm-Rudman
The closest thing ever enacted that is like the tax trigger was the package of budget laws effective in the late 1980s and early 1990s commonly known as "Gramm-Rudman-Hollings." Under GRH there was an automatic reduction of budget authority and outlays if Congress and the president failed to reduce the deficit according to schedule.
Although at first these provisions were accepted as a necessary evil, many members of Congress -- particularly Democrats -- grew to despise them. Members of Congress like to spend, and GRH put a lid on their spending.
But sometimes it was possible to get in some extra spending. Under GRH, just as under the tax law, complexities developed as smart lawyers discovered loopholes. With their bosses under unceasing political pressure, the staff of the budget committees had tremendous incentive to develop complex strategies for getting around the spirit of the law.
Of course, the major difference between the tax trigger and GRH is that under the targets used in the proposed trigger, any shortfall is made up with automatic tax increases, while under GRH shortfalls were remedied with automatic across-the-board cuts in spending. Everybody in Congress grew weary of dealing with GRH, but the spending cuts were more bothersome to Democrats than Republicans. It is likely that everybody in Congress would grow weary of a tax trigger if it is ever enacted, but because it could result in automatic tax increases, it is more likely to incur the wrath of Republicans than Democrats.
Costs vs. Benefits
A tax trigger would give Congress and President Bush some insurance against large deficits. But the insurance is far from perfect, and it comes at a price. As noted above, it will undoubtedly give rise to budget shenanigans and further gimmicks. In some circumstances it could create perverse incentives for lawmakers to increase spending. And it could create administrative and compliance problems.
The overt uncertainty a tax trigger would add to the law is particularly unsettling. If taxpayers cannot plan on tax cuts with some reasonable probability, any incentive effect that tax cuts may have for increasing work effort and capital formation will be significantly diminished. And it wouldn't be surprising if estate planners became completely bewildered in the presence of a tax trigger. Not only would they need to guess about an estate's value and the time of death, but with a trigger they would have to guess about whether or not the phased-in elimination of the estate tax would be effective at all.
The tax trigger could cause other unintended effects as well. When times are bad, folks have grown accustomed to increased government aid, not less. There may be some political fallout if the economy falls into recession and scheduled tax cuts are short- circuited by a tax trigger.
The tax trigger may put fiscal discipline on auto-pilot, but it is not inconceivable that the public -- with tangible benefits on the line -- may more closely monitor Congress's spending habits. And just like homeowners with adjustable rate mortgages who continuously monitor interest rates, taxpayers may start keeping close tabs on published budget figures to see how good their chances are for a continued tax cut.
If support for the Bush plan is particularly strong, Republicans may not need to add a trigger to a major tax bill. Certainly, conservatives are not eager to do so. For example, Senate Finance Committee Chair Charles E. Grassley, R-Iowa, opposes the tax trigger supported by Snowe. "We don't need it," Grassley said. "It is easier for Congress to raise taxes than lower taxes. It is not good for the economy to have it."
The Republicans may be able to get away with something less than a full-fledged trigger that helps shield the government from deficits if budget projections do fall short. During the 1994 debate on health care reform, there was a lot of discussion of "hard" and "soft" triggers for increasing health insurance subsidies. Under a hard trigger, provisions would automatically go into effect if targets for health care coverage were not met. Under the soft trigger, if health insurance coverage did not meet predetermined targets, Congress would be required to review the problem within a limited time and vote for remedies under expedited procedures.
If Congress were to adopt a soft tax trigger in 2001, using the 1994 health care proposals as its model, it might require an up-and- down vote on repeal or suspension of the scheduled tax reduction within a short period immediately following the close of any fiscal year in which fiscal performance fell short of expectations.
Any type of trigger would be a gimmick and an admission that Congress simply does not trust itself to accept pain even when necessary. But GRH was a gimmick that was needed to pass the tough budgets of the late 1980s. And the alternative minimum tax was a gimmick needed to pass the Tax Reform Act of 1986. Even if only a small minority of lawmakers supports it, a tax trigger of some sort may be needed to pass a major tax cut in 2001 if it is going to be anywhere close to the $1.6 trillion President Bush is seeking.