A key question in the income tax debate has been whether tax cut supporters were taking a “responsible” approach in their proposals. They have worked hard to convince Oklahomans that we can afford tax cuts without disrupting core services.
Revenue growth triggers are the latest gambit in this effort. Under triggers, automatic tax cuts would go into effect whenever revenues increase by a certain percentage. Supporters say that triggers promote fiscal responsibility because they prevent us from cutting taxes during a recession.
The word out of the Capitol is that Governor Fallin is pushing to include triggers in the final proposal that comes out of conference committee. Triggers were part of the Governor’s original plan, and they have been added by the Legislature to two other bills.
We previously discussed why triggers are bad policy in general. An examination of the specific language in these triggers reveals numerous ways that they would not protect us from cutting taxes when we cannot afford it.
For example, the triggers added by the House onto SB 1571 would cut the top rate any time state revenues increased by at least 2.5 percent from year to year. First of all, 2.5 percent is a much too low bar for growth. Inflation over the last year was 3.2 percent, which is fairly typical. Inflation rose above 2.5 percent in six out of the last ten years. In any of these years, 2.5 percent revenue growth would have meant income rose more slowly than expenses. The state would be cutting services even without a tax cut.
Second, a year to year trigger ignores whether the growth was due to a boom economy or merely a partial recovery from a recession. Revenues could drop by 20 percent and never be allowed to recover, because every bit of growth triggers another cut. In fact, that’s exactly what happened in January, when a trigger reduced the top rate from 5.5 percent to 5.25 percent even though revenues remain substantially lower than they were in FY ’08. That trigger took $125 million out of the budget at a time when schools are being forced to lay off teachers. Lawmakers seem to have very short memories.
The triggers added by the Senate to HB 3038 did attempt to respond to this concern, but in the process they created new problems. The Senate’s trigger is set at a 5 percent increase above fiscal year 2012. By setting the base year at 2012, they avoid the problem of a very low base caused by a recession. However, the “growth” year to year is not adjusted by inflation, and it is also cumulative over multiple years. It’s not hard to imagine a scenario where that triggers a tax cut at a very bad time.
For example, revenues could rise by 1 percent in 2013 and then stay flat for the next 4 years. We already know many expenses will go up over that time due to inflation, rising health care costs, and increased caseloads and enrollment. To cover those expenses, we would be forced to make significant cuts to core services. Yet by the trigger’s definition, that would be enough “growth revenue” to force another tax cut.
If legislators could predict the future of our economy, they should be off making millions on Wall Street. But they 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.