Lawmakers began the year promising large, immediate cuts to the income tax, but their hopes soon collided with budget reality. With state funding already falling behind Oklahoma’s needs in many areas, legislators have found no easy way to pay for income tax cuts, whether by eliminating tax preferences, reducing services, or raising other taxes. Meanwhile, new obligations are piling up, like the $100 million per year that will be needed to reform the child welfare system.
Even so, a significant danger remains that we will find another way to cripple our state’s finances. Some legislators are pushing an automatic trigger that would ratchet down the income tax any time state revenue grows by a certain percentage.
Governor Fallin’s plan included a tax cut trigger whenever revenues increased by 5 percent or more from year to year. Triggers have recently been incorporated into two other bills: a House committee added a trigger into SB 1571 that cuts the top rate another quarter of a percentage point whenever state revenue grows by 2.5 percent over the previous year. A Senate committee put a trigger into HB 3038 that cuts taxes whenever revenue from non-income tax sources reaches 5 percent above FY 2014. The trigger’s definition of “growth revenue” is cumulative year to year, so if revenue rose 1 percent following the tax cut and then stayed flat for the next 4 years, the trigger would go into effect. All of these bills would use triggers to eventually eliminate the income tax entirely.
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.
Tax cut triggers are bad policy for three main reasons:
1) Triggers would prevent us from climbing out of budget holes. Revenues could drop 20 percent in a recession but never be allowed to recover, since every 2.5 or 5 percent gain would trigger an automatic tax cut. We don’t need to look far to find an example. The cut that went into effect this year was triggered by growth that was only a partial recovery from the worst revenue collapse in decades. That’s why former State Treasurer Scott Meacham said instituting this trigger was one of the things that he was least proud of doing during his time in office.
2) Year to year revenue growth is not “extra money.” As the economy grows, Oklahoma will have to deal with inflation, a larger population, and more infrastructure to maintain. That brings in more revenue, but it also means higher costs for the state. We also know that our needs will increase in several areas. We have an aging population that will require more public supports while contributing less productivity to the economy. We have deteriorating transportation and water infrastructure that will bring escalating repair bills. We have pension obligations that are still inadequately funded. All of these factors will make it more expensive just to maintain core services at their current levels. A ratcheting down of tax rates implies that we can grow out of the need for public services. That’s like saying we’ve grown out of our clothes, so we don’t need to buy new ones.
3) The trigger sets the wrong priority for Oklahoma. Our state has a dire need for investment in numerous areas. We must improve student achievement to meet increasingly strict testing requirements. We must fix a child welfare system that is putting kids in danger. We must treat an epidemic of mental health and substance abuse problems that is threatening to overwhelm the criminal justice system. We must improve our college graduation rate to ensure a skilled workforce that can build our future prosperity. And those are only the issues we know about. We can’t predict every problem the state may face in the next couple decades. Yet a trigger would shove tax cuts to the front of the line, regardless of our needs and responsibilities.
Deciding tomorrow’s tax cuts today would tie the hands of future legislators, make them less accountable, and limit their ability to make the best decisions based on the circumstances that they face. Lawmakers shouldn’t use triggers to sneak in bad policy through the back door.