Roxanne Bland is State Tax Notes’ contributing editor. Before joining Tax Analysts, Bland spent 17 years with the Multistate Tax Commission, where she worked with state revenue agency representatives to draft model legislation pertaining to sales and use taxation and corporate income, analyzed and reported on proposed federal legislative initiatives affecting state taxation, worked with legislative consultants and representatives from other state organizations on international issues affecting states, and assisted member state representatives in federal lobbying efforts. Before that, she was an attorney with the Federation of Tax Administrators for over seven years.
In this edition of The SALT Box, Bland discusses tax triggers by providing a historical look into their development in California and how other state legislatures have implemented them.
There is a saying, “as California goes, so goes the nation.” When it comes to tax triggers, this certainly seems to be true. In the 1990s, California experimented with triggers, which could go up or down depending on the revenue raised in the preceding year. During that time, thanks to the dot-com boom, the state treasury was flush with cash. In 1998 then-Gov. Pete Wilson signed a law lowering California’s vehicle license fees; car owners received rebate checks and all fees were lowered by two-thirds. Californians got used to paying lower fees to register their cars, trucks, trailers, and motorcycles. But the catch was that the law required the license fee be returned to 2 percent of a car’s value when the budget was in the red.
Five years later, in 2003, while then-Gov. Gray Davis was at California’s helm, the state faced a budget shortfall of $38 billion, threatening cuts in basic government services unless legislators found funds elsewhere. The trigger went into effect. Californians saw their vehicle license fees triple. Republicans charged that the Davis administration illegally increased the fees to help plug the gaping hole in the state’s budget. Davis countered that the increase was attributable to a provision in the law enacted under the Wilson administration. The increase was challenged in court by dozens of Republican legislators and the Howard Jarvis Taxpayers Association, asserting that the hike was illegal because any tax increases must be approved by two-thirds of the Legislature.1
During this time California’s political climate was volatile. A trio of Republicans in the State Assembly began a recall effort, collecting enough signatures to hold an election. Voters, incensed over the fee increases, the concomitant electricity and budget crises, and Davis’s perceived mishandling of events in general, booted him out of office, replacing him with Arnold Schwarzenegger. Schwarzenegger rescinded the trigger on license fees.2
The California debacle notwithstanding, other states began implementing tax triggers, except these triggers were a one-way street. Unlike California’s tax trigger, which could go up or down, the triggers enacted in other states cut taxes, and those cuts were permanent. Massachusetts was the first state to enact triggered tax cuts in 2002, followed by West Virginia in 2008. Today, 10 states and the District of Columbia have tax cut triggers on various taxes, such as personal and corporate income taxes.3
Are States Shooting Themselves in the Foot?
Tax cut triggers “are a new take on an old concept: contingent enactment of a legislative provision.”4 It is not unusual for a legislature to enact laws with contingent enactment clauses; certain features of new laws will become operative only if specific conditions are met. Tax cut triggers are based on this model, that is, tax reform measures are contingent on state revenues meeting or exceeding established targets. In practice, a tax cut trigger may work like this: A state legislature passes tax cuts over a period of years. There may be an initial cut that goes into effect immediately, but future reductions are tied to some benchmark, perhaps by achieving an overall revenue target.
Opponents of tax cut triggers say that they are an exercise in fiscal irresponsibility. It is true that a legislature cannot legally bind a future legislature. It is true that if future tax cut triggers would have an adverse consequence on revenue, the future legislature can postpone or reverse the trigger. However, many legislators have publicly pledged not to raise taxes, and those who have not are concerned that voting to scale back or suspend a tax cut trigger may open themselves to attacks on raising taxes. Then, too, several states have supermajority requirements to increase taxes. “Simply stated, ‘once a tax cut is set in law, it is politically hard to reverse.’”5 Tax cut triggers allow lawmakers to escape accountability. They can claim credit for voting for tax cuts that, if they took effect immediately, might require unpopular cuts in state services, thereby gambling that the cuts will not harm the state in the future. In addition, future lawmakers can disavow responsibility for the harm the tax cuts cause by pointing out that the cuts “took effect only after a ‘fiscally responsible’ trigger mechanism allowed them to.”6
There is the reality that legislatures considering the implementation of a tax cut trigger rarely have any idea how those cuts might affect future services. Up-to-date, multiyear forecasts of what those triggers will cost in forgone revenue when they take effect are wanting, and “legislators almost never know what state services will likely cost at that time.”7These kinds of forecasts could be done, but rarely are, and without such knowledge, lawmakers cannot estimate the impact of future tax cuts on state services.
There are also questions of affordability when the triggers take effect. Most tax cut triggers do not consider the effects of inflation or the overall growth in population (and therefore the need for increased spending). They do not take into account the affordability of the cut in the long term. For example, in states with triggers that have no time limit on when they can take effect, the triggers might be based on a one-year revenue increase measured in dollars. “Since inflation erodes the value of those dollar thresholds, it will get steadily easier over time for the tax cuts to take effect, even though the share of revenue that the tax cuts will strip away remains constant or even increases.”8 Nor do tax triggers typically take into account the need for reserves in emergencies, such as natural disasters, federal aid cuts, recessions, or other unforeseen circumstances.
Interestingly enough, there is not much documentation on why tax cut triggers are a good idea. Research produced only one document in support of tax cut triggers, and even that mainly concerned what elements make for a good trigger. From what I could glean from the report, advocates of tax cut triggers say they are a fiscally responsible way to cut taxes because they only become effective if the state has the revenues to pay for them. As for the criticism that reliance on a blind formula for future cuts may hurt the state’s fisc in the event of a recession or other disaster, supporters say this is “equally true of all tax rates, since unchanging rates are similarly unable to respond to recessions or revenue needs.”9Criticism leveled at tax cut triggers centers on the design of the trigger, that is, the specific approaches used rather than the concept itself. Tax triggers, it is said, “promote certainty and ensure revenue stability through a program of incremental tax reforms.”10 While it is true that poorly designed triggers can result in the problems outlined by critics, “well-designed triggers introduce greater flexibility and responsiveness into the tax code, while codifying a commitment to improving tax policy, offering a prudent way to address any uncertainties during the implementation of tax reform measures.”11 If a trigger has a negative effect on revenues, it is up to, and the responsibility of, “the legislature to postpone or reverse triggered tax cuts, just as they have the ability to raise taxes in other circumstances.”12
Oklahoma Is Not OK
Oklahoma appears to be the poster child for all that can go wrong with a tax cut trigger. The personal income tax is the largest single source of revenue in the state, pulling in $3 for every $8 collected in 2012.13 In the past decade, Oklahoma lawmakers have twice passed personal income tax cut legislation triggered by revenue growth. In 2006 the top rate was lowered from 5.5 percent to 5.25 percent, which took effect in 2012. The second tax trigger legislation, passed in 2014, lowered the rate to 5 percent and was to take effect in 2016. That same law provided for a second tax cut, down to 4.85 percent, to take effect in 2018.
The 2014 tax cut legislation was based on revenue estimates at a time when the state was enjoying strong growth fueled by high energy prices. It was signed by Gov. Mary Fallin (R) in April of that year, and approved by the State Board of Equalization in December. But no sooner had the board authorized the cut than oil prices sank and revenue began to fall. Yet, because of the way the legislation was written,14 the first tax cut took effect in 2016, in the face of still-plummeting oil prices, a slowing economy, and still-falling revenues. The state faced a $1 billion shortfall. To balance the budget, the state made deep cuts in school funding, healthcare, correctional facilities, and other core services. The next tax cut is scheduled to be triggered in 2018, provided the board certifies that 2018 revenues are expected to grow “even modestly compared to 2017 — even though the state will almost certainly continue to face substantial budget shortfalls and enormous unmet needs.”15
It is no wonder, then, that on February 22, the Oklahoma Senate Appropriations Committee voted 32 to 4 on S.B. 170, which repeals the trigger that would further reduce the income tax rate in 2018. Sen. Roger Thompson (R), the author of the bill, said that he hears from his constituents that “they are very concerned about the current budget situation and how it is affecting core services like education, healthcare, public safety, and transportation. They worry the trigger could undo any improvement by wiping out growth revenue.”16 Recently, S.B. 170 was sent to the full Senate, which passed the bill on March 14.17
Are tax cut triggers worth the paper they are written on? Given the experiences of some of the states that have used them, apparently not. Still, there are those who claim that tax triggers can work if designed correctly. Perhaps in the future, state legislatures considering a tax cut trigger will learn from the mistakes of those in the past, and actually build a better gun.
1 Jennifer Oldham, “Days Before Vote, Higher Vehicle Fees,” Los Angeles Times, Sept. 29, 2003.
2 Elaine S. Povich, “Triggers Cut State Taxes; But Are They Good Policy?” Stateline, Nov. 16, 2015.
3 Michael Mazerov, Marlana Wallace, “Revenue ‘Triggers’ for State Tax Cuts Provide Illusion of Fiscal Responsibility,” CBPP (Feb. 6, 2017). Not all of states’ tax cut triggers apply across the board. North Carolina’s tax cut trigger applies only to the corporate income tax. Maine’s tax cut trigger applies only to the personal income tax. Triggers in other jurisdictions cut other types of taxes, such as District of Columbia, which has triggers on the personal and corporate income tax, as well as the estate tax.
4 Jared Walczak, “Designing Tax Triggers: Lessons From the States,” Tax Foundation (Sep. 7, 2016).
5 See supra note 3, at 4.
6 See supra note 3, at 4.
8 Id. at 9.
9 See supra note 4, at 16.
10 See supra note 4, at 17.
12 See supra note 4, at 16.
13 “Everything You Need to Know About Oklahoma’s Income Tax,” StateImpact Oklahoma(2012).
14 Norton Francis, “Oklahoma Pulls the Trigger on an Unaffordable Tax Cut,” TaxVox: State and Local Issues, Jan. 5, 2015. The legislation’s tax cut goal was not tied to actual collections, but to revenue estimates. For the 2016 tax cut, the trigger would take effect if the state’s latest projection for 2016 exceeded the 2013 revenue estimate for 2014. It did and the cut took effect, even though actual collection for 2014 was $300 million less than estimated.
15 David Blatt, “Tax Triggers Are Anything but Fiscally Responsible,” Oklahoma Policy Institute (Feb. 13, 2017).
16 The Associated Press, “Oklahoma Senate Panel OKs Repeal of Income Tax Trigger,” Feb. 22, 2017.
17 William W. Savage, “’Stop Digging’: Repeal of Income Tax Cut Trigger Advances,” NonDoc,Mar. 14, 2017.