ADVOCACY FOR REVENUE/TAX TRIGGERS ON THE STATE LEVEL
On March 16, 2017, Virginia Republican governor candidate Ed Gillespie proposed a tax reduction plan. He claimed that his tax cutting plan would save $1,300 per average Virginian household, and create 50,000 new private sector jobs. This plan would cut Virginia’s income tax rate last targeted in 1971. The tax cut is unique in how it relies on certain financial mechanisms known as revenue triggers. These revenue triggers have seen mixed success in several states, which we will go into further detail. Here, we will talk more about revenue triggers, as well as their shortcomings and benefits.
Revenue triggers, also known as tax triggers, are dependent on the growth of state revenue. As Jared Walczack of taxfoundation.org states, the tax cuts will implement, over time, only when state revenue growth has hit a certain benchmark. Thus, they would be able to sufficiently account for a necessary drop in tax collection, because the state had reached a necessary level of state revenue. Furthermore, the tax trigger represents a choice; if a state’s revenue has not hit a certain growth stage, the tax cuts will be delayed for a future date. With more discussion on tax triggers, we will more clearly see their impacts on the state economy.
The government budget constraint describes how the government finances its activities. This is applicable for all levels of government, and is relevant on the topic of tax triggers. The equation for the government budget constraint is G + TR ≡ T + BS + MC. Everything is financed in this equation. For example, if you want to raise government spending, you must subsequently increase taxes, and/or increase bond sales, and/or increase tax revenues. Tax cuts, in this example of tax triggers, would have the implication of lowering government spending, which would be fine because they have sufficient revenue to do so. The state government, in this case, would be pursuing tax cuts to stimulate aggregate demand, which will in turn could stimulate the economy through increased spending, job creation, etc.
There are several legitimate concerns about revenue triggers that need to be addressed. One of these concerns is how an absence of a tax cut in a period would mean a tax hike, as businesses and consumers would be exposed to increased taxes over a period of lower taxes. This, however, can work as a benefit because the proposed tax trigger would be working to automatically propagate appropriate fiscal policy dependent on state revenue. The correct response to financial depressions, expansions, etc. can be assessed through the tax trigger. Another concern is how the tax triggers would be how some revenue triggers are based on projected revenues, that can wildly differ from actual revenues in future years. This is a legitimate problem that can be readily fixed through more well-designed tax triggers, that use more accurate actual revenue measures. Lastly, TaxPolicyCenter.org reports that tax triggers seem to be enacting previous party legislation into the future, which may or may not suitable for the state in its current economic situation, leading to premature spending cuts. The tax triggers must be more amendable to avoid this situation from happening.
As mentioned earlier, there are several states that have already undergone the process of tax triggers. Here, we will mention the effects of Oklahoma’s tax trigger. Oklahoma’s tax trigger was dependent on prospective 2016 revenue growth, which was past the actual revenues of 2014, in which it was enacted. Thus, tax cuts were enacted prematurely, despite the large decline in state revenue in 2016, causing a scramble to reduce state government spending. Another issue concerned the politics of the state, as “some critics argued it was primarily designed to allow state lawmakers to claim credit for a tax cut without actually cutting taxes.” (NewsOK). Since revenue growth was tied on a year to year base, a significant decline in one year met with a rise in revenue growth in the preceding year would result in the activation of tax cut, despite net change in revenue equal to zero.
Even in a state where tax triggers seemingly failed, we can observe its success. As mentioned by Walczack, Oklahoma’s tax trigger failed to activate and lower income tax when more well-designed revenue baselines were not reached. Thus, it was delayed until the state claimed enough revenue growth to support such a tax cut. Another benefit to tax triggers in general is that they further lower the relatively low legislation lag in fiscal policy because they work automatically. Thus, quick and efficient fiscal policy can be enacted given certain economic conditions.
Revenue triggers are gaining popularity over the years. Eleven states are already familiar with the use of tax triggers causing tax cuts/hikes. A few of these states, like Kansas and North Carolina, have achieved success with tax rate reduction based on triggers, as reported by Americans for tax reform. Thus Gillespie’s plan, if it is well-designed to appropriate baselines, can achieve success for Virginia as tax triggers have in Kansas, North Carolina, and Oklahoma.