In addition to an immediate cut in the top income tax rate from 5.25 to 4.8 percent, the tax plan agreed to last week by Governor Fallin and legislative leaders includes an automatic future tax cut tied tied to revenue growth. In tax year 2015, an additional cut in the top income tax rate from 4.8 to 4.5 percent would be triggered if revenues from five specified taxes grow by 5 percent. This would result in an estimated revenue loss of $170 million.
Previously we argued that triggers are bad policy. We stated:
Proponents of triggers may try to sell this as a “responsible” way to cut taxes, but it’s the opposite. It’s an attempt to avoid responsibility by putting the tax system on auto-pilot. The result could be a wreck that everyone can foresee but no one can prevent.
These kinds of concerns led a bipartisan group of 30 prominent business and civic leaders to urge the rejection of triggers.
Regardless of the problems with triggers in principle, the specific trigger mechanism in the tax bill, HB 3061, is particularly flawed. The bill states that in December 2014, which is mid-way through FY 2015, the Board of Equalization will determine if FY 2014 revenues from the five identified taxes rose by 5 percent from FY 2013. If so, the income tax rate reduction will take effect on January 1, 2015. The Legislature has no involvement in authorizing or approving the cut.
The problem with this approach is that it could lead to automatic tax cuts that will take effect even if the economy is faltering and revenue collections are beginning to fall. As long as revenues grew in FY 2014 by 5 percent compared to FY 2013, the tax cut will be triggered on January 1, 2015. But what if Oklahoma enters an economic downturn in June or September 2014? Revenues could fall below estimates in the first half of FY 2015, yet the tax cut would still kick in automatically based on the previous year’s increase. The tax cut could create or exacerbate mid-year revenue shortfalls in FY 2015 and lead to greater budget shortfalls for FY 2016. Since the lower rate would already have kicked in, there would be no chance for the Legislature to undo the tax cut without a supermajority.
Unfortunately, there is no provision in HB 3061 that could suspend the automatic tax cut if the state’s economic or fiscal circumstances change in the period prior to the trigger taking effect. By putting the controls on auto-pilot, the result of HB 3061 could indeed be a wreck that everyone can foresee but no one can prevent.