When Tax Triggers Aren't Triggers
Lessons from North Carolina
Many states have turned to triggers to implement income tax rate reductions subject to revenue availability. Broadly speaking, this is good policy, and an approach that I’ve encouraged. Triggers have several clear benefits:
They allow lawmakers to meaningfully commit to future rate relief, providing greater predictability for businesses and individuals engaged in economic decision-making.
They statutorily prioritize rate relief, making tax cuts, rather than spending growth, the default response to greater fiscal capacity.
They allow rate reductions to be phased in responsibly, making further reductions contingent on revenues exceeding established benchmarks and giving legislators time to evaluate the sustainability of the ultimate target rate, rather than adopting a large rate cut one fell swoop.
But the appeal and logic of tax triggers can also incentivize lawmakers to wrap largely revenue-insensitive phased tax reductions in “trigger” language, presenting them as revenue-dependent when they really aren’t. Sometimes states can afford a tax cut without triggers, and sometimes lawmakers may genuinely want to cut the size of government along with the tax reduction. But if that’s the case, lawmakers need to be honest with the public, and just as importantly, with themselves. Just because a tax trigger has been created doesn’t mean it’s effective.
Some triggers are ineffective because lawmakers were overly restrictive when designing its conditions, meaning that tax cuts don’t actually trigger even in periods of sustained revenue growth. Others are the opposite: superficially, they seem to make future rate reductions conditional, but in practice, they just act as stepped reductions, or trigger at inopportune times.
This is often inadvertent, as tax trigger design can be confusing. But if policymakers adopt an approach that purports to only reduce rates subject to revenue availability, and then a reduction gets triggered during an economic downturn, that’s bad for everyone: for agencies facing unexpected spending cuts, for lawmakers who might have to vote for a tax increase, and for an electorate that believes, with justification, that it was promised something else.
This is an argument for designing tax triggers correctly, and also for calling out triggers that aren’t working as intended. To that end, I have a new piece on North Carolina’s current revenue triggers, demonstrating how they fail to achieve their objectives, with the potential to trigger rate reductions even in the midst of a recession.
Lawmakers who believe in the pro-growth tax reforms North Carolina has adopted over the past 13 years, which include significant income tax cuts, should want to preserve those gains by guarding against an accidental misstep that could undermine everything they have accomplished.
You can read the piece here.
(I do offer one caveat: I wrote this piece several months ago, but it was only published yesterday, a few days after the release of a revised state revenue forecast. The new numbers wouldn’t materially change the analysis. Had the piece been written using the new data, every argument would remain and the scenarios outlined would be quite similar. But I did want to acknowledge that the piece does not use the latest data, something I may try to address in an update.)
If lawmakers use triggers, they should genuinely be triggers. And if policymakers want to ensure that the progress they make on tax reform and tax relief remains in place, they should want to guard against an overextension that could sour their colleagues on tax reform as a whole.
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