The Oklahoma Senate and House of Representatives are both considering bills to cut Oklahoma’s top income tax rate in future years based on revenue targets, or triggers. Pushing tax cuts into the future and making them conditional on triggers is presented as a “responsible” way to cut taxes. However, they are the opposite of responsible; these bills are an attempt to avoid responsibility for critical decisions by putting the tax system on auto-pilot.
SB 1246 would cut the top income tax rate from 5.25 percent to 4.85 percent in two phases:
- The top rate would drop to 5 percent in 2016 or in whatever year revenue is first projected to be greater than in FY 2014;
- Following the first rate cut, the top rate would drop further to 4.85 percent in 2018 or whenever revenues are projected to grow by more than the estimated revenue loss from the tax cut.
SB 1246 passed the full Senate on a 32-10 vote and had its title restored, which means it would go directly to the Governor if passed by the House without amendment. If both phases of the tax cut take effect at the earliest possible date, the bill would reduce state revenues by $267 million in TY (Tax Year) 2018. The Tax Commission cannot even provide estimates for the impact after that year. However, they state that “the full impact of this measure could occur in FY 19 and if the proposed rates are in effect would be in excess of $267.0 million.”
HB 2508 would cut the top rate to 5 percent in 2016 or in whatever year revenues are first projected to grow by more than the revenue loss from the tax cut. HB 2508 passed the Appropriations and Budget committee on a 11-9 vote and awaits action by the full House.
If either of these bills are enacted, this legislature will be making binding decisions on future legislatures regardless of future budget needs. The trigger mechanisms don’t provide firm safeguards, as there are various scenarios under which the tax cut would kick in even if the state was facing budget shortfalls. For example, under the Senate proposal, the top rate could be cut in 2016 even if FY 2016 revenues are projected to decline from FY 2015, so long as they stay above 2014 levels.
By pushing the tax cut out at least until 2016, the legislature is acknowledging that it cannot afford a tax cut right now given the state’s pressing budget obligations. In the absence of any long-term budget forecasts or fiscal impact statements, on what basis can the legislature determine now that a tax cut will be affordable in 2016 or 2018? The factors that are creating intense budget pressures now – rising health care costs, declining federal support, staffing shortages in our prisons, rising expectations for our public schools, the court-ordered child welfare settlement – are not going away anytime soon.
Two years ago, a bipartisan group of thirty of Oklahoma’s top business leaders signed a letter opposing trigger mechanism that would automatically lower Oklahoma’s income tax in future years based on future growth in state revenue. They wrote:
It is the responsibility of each legislature to make decisions based on the state’s needs at the time. Once tax cuts are written into law, it will be almost impossible, constitutionally or politically, to change course, whatever the situation.
Enacting future tax cuts now would especially hinder our ability to address future unforeseen circumstances, such as natural disasters or an abrupt economic downturn.
Legislators cannot predict the future, and they cannot design a formula to fit every possible scenario. That’s why putting our tax system on auto-pilot is a risk we should not take.