The United States Senate is poised to vote as early as this week on a major tax overhaul bill. Although tax reform is the highest priority of Congressional Republicans and the White House, crafting legislation capable of securing a 51-vote majority in the narrowly-divided Senate has been a huge challenge for Republican leaders.
For several Republican Senators, including Oklahoma Sen. James Lankford, the main concern with the tax bill is the huge amount it would add to the federal deficit. According to the official estimate from the non-partisan Congressional Budget Office, the Senate bill would increase the deficit by $1.4 trillion from 2018 to 2027. Other respected estimates show an even larger deficit increase resulting from this plan.
Some Republicans have disputed the deficit projections from the CBO and other non-partisan experts, claiming that the tax cut would generate enough economic growth to fully or largely offset the loss revenue (note that no serious economist believes this). Senator Lankford, however, is urging caution. His wariness is due in part due to recent experiences in Oklahoma and Kansas, where tax cuts have failed to spark economic growth and have instead led to large budget shortfalls and the need for deep cuts to services. In a press conference this week, Sen. Lankford laid out his concerns, as reported by Talking Points Memo:
“We can’t ignore the debt and deficit issues,” he said. “As conservatives, we’ve said for a long time that to get ahead of the deficit we have to control our spending and have a growing, healthy economy. Well, if we use all of the tax reductions to just offset, we’ll never get on top of it.”
“Those of us in Oklahoma and Kansas and the middle of the country have seen some of this in our own state legislatures,” Lankford said. “It’s important to learn from what we’ve seen.”
To address concern that the tax bill will blow up the budget, Sen. Lankford, along with Sen. Bob Corker of Tennessee and other deficit hawks, have been working with Republican leaders and the White House on a “backstop” or “trigger” mechanism for when revenue gains fail to materialize. Although no specific details about the “trigger” have been shared with the public, Corker says that it would raise taxes “if the plan does not boost the U.S. economy enough,” according to CNBC.
Oklahoma’s Trigger Warning
While coupling large tax cuts to a formula that would provide for automatic tax increases may be intended to promote fiscal responsibility, the reality is that triggers are an inherently flawed policy tool. Oklahoma’s recent experience provides an especially stark example of the problem with triggers.
“Once tax policy was set on auto-pilot, lawmakers couldn’t or wouldn’t take the corrective action needed to change course.”
In 2014, Oklahoma lawmakers passed a two-phase cut to the state’s top personal income tax rate that was tied to future revenue growth. The tax cut lowering the top rate from 5.25 to 5 percent was triggered in late 2014 based on revenue projections for fifteen months out that were soon proven too optimistic. Yet once tax policy was set on auto-pilot, lawmakers couldn’t or wouldn’t take the corrective action needed to change course. The tax cut took effect in January 2016 just as the state was announcing the first of two mid-year revenue failures totaling 7 percent and was facing a $1 billion budget shortfall for the next fiscal year. It’s notable that Oklahoma lawmakers this past session repealed the second triggered tax cut baked into the 2014 law that could have automatically lowered the income tax next year.
A federal tax trigger would differ in the details, but it would involve similar risks of bad timing. This is especially true if an automatic tax increase was triggered by declining tax revenues in the midst of a recession. As Matthew Yglesias writes:
Trigger proponents want a mechanism that will cancel tax cuts if the fanciful growth forecasts of ardent supply siders turn out to be wrong, but it’s difficult to design a mechanism that accomplishes that without also introducing an “automatic destabilizer” that delivers a hefty dose of anti-stimulus to the economy if it falls into recession.
As noted by the chief economist for the U.S. Chamber of Commerce in a blog post titled “A Fiscal Trigger is Impractical, Unreasonable, and Unnecessary,” a recession at some point in the next decade is a virtual certainty; having one hit while a trigger was in place “would create enormous problems.”
The Bottom Line
There is simply no way for Congress in 2017 to anticipate what the fiscal and economic circumstances will be over the next decade and to design a trigger that will work as intended at some point off in the future. Senator Lankford should hold firm to his insistence that the tax bill not increase the deficit and not settle for a defective substitute.
You can email Sen. Lankford here or call his office at (202) 224-5754.