Ten states, including Oklahoma, have enacted tax cuts in recent years that are deferred to a future date based on state revenues reaching a certain level or rate of growth. A new report by the Center on Budget and Policy Priorities, a national think tank, makes a convincing case that while tying tax cuts to “triggers” may seem fiscally responsible at first glance, triggers are likely to harm states’ ability to provide critical service for their residents.
Twice in the past decade, Oklahoma lawmakers have passed tax cuts triggered by future revenue growth. The first, approved in 2006, lowered the top income tax rate from from 5.5 to 5.25 percent and took effect in 2012. The second was passed in 2014 and lowered the top rate to 5.0 percent in 2016, with a second cut to 4.85 percent that could take effect in 2018. The Center on Budget’s report identifies several flaws with triggers, all of which apply to Oklahoma’s experience.
- Triggers fail to account for state fiscal needs: Oklahoma’s triggers have been tied to future revenue levels, without any regard to how much budgets may have been cut in preceding years or how much it may cost to provide basic services at the levels that Oklahomans expect.
- Triggers can take effect even during economic downturns or at other times when revenues are particularly needed: Due to how Oklahoma’s 2014 law was written, the trigger threshold to cut taxes was met for 2016, even though the state was in an economic downturn, a mid-year revenue failure had been declared, and we knew we were facing a $900 million budget shortfall (that eventually grew to $1.3 billion). The next tax cut could take effect even if revenues remain substantially below pre-downturn levels.
- Triggers let lawmakers claim credit for cutting taxes while avoiding accountability for the consequences: Voting for a tax cut that will only take effect in the future lets lawmakers claim immediate credit with their constituents while avoiding the blame for cuts to services that would be needed to keep the budget in balance. As the Center notes, lawmakers can “gamble that cuts will not harm public services or the state’s financial stability down the road.” In Oklahoma, even once it was clear that the last tax cut was going to deepen the state’s huge budget hole, it was hard to hold anyone responsible for a decision taken years previously by a different Legislature.
Finally, the report notes that there is no good reason to bind the hands of future legislatures when those future lawmakers can make better-informed decisions about whether tax cuts are advisable. In late 2014, as Oklahoma was about to trigger its first tax cut amid a budget shortfall, State Treasurer Ken Miller said:
I just don’t see any financial reason to pass a measure predicated on future revenue growth when they could have waited to preserve flexibility for challenges like the ones we are facing today … (T)he most responsible thing is wait until that revenue growth occurs and make a decision based on other factors at the time.
During the subsequent legislative session, reversing course proved politically impossible, even though nearly all lawmakers agreed that moving ahead with a tax cut in 2016 was a bad idea.
The Center on Budget’s report concludes:
No simple formula can take the place of careful deliberation by lawmakers with the information they need to make good decisions, yet that is what triggers typically are — a highly inadequate formula for estimating whether tax cuts might be affordable built on very limited information about the future. Lawmakers who agree to cut state revenues without knowing whether the cuts will be affordable abdicate their responsibility to prudently manage state finances, often at significant cost to the state’s future.
The second phase of the tax cut approved in 2014 that lowers the top rate to 4.85 percent could take effect in 2018 if the Board of Equalization certifies in February that FY 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.
Fortunately, Oklahoma still has a chance to reverse course. We are now seeing a growing commitment from our elected leaders to move away from the fiscal habits of recent years — including the use of one-time revenues to fill budget holes, growing off-the-top appropriations and tax cut triggers — that have contributed to a growing structural budget deficit. Several legislators have introduced bills this session that either repeal the second tax cut entirely or tie it to a much stronger recovery in state revenue. Let’s hope that one of these measures passes this year and that future Oklahoma lawmakers avoid the trigger temptation entirely.