Itchy Tax Trigger Finger: Tax Foundation Says Aim Toward Foot

Accounting for all the possible curveballs the future economy might throw at our state is impossible. That’s why legislators bother coming together every year to assess our budget and make choices based on the best available, most current information. One dubious new style of tax change, “tax triggers”, attempts to base major future tax and revenue changes only on the information we have today. Tax triggers are dangerous and generally work by automatically kicking in a tax cut when revenue or some other metric reaches a certain level.

At the July 27 Tax Reform and Relief Task Force meeting, the conservative Tax Foundation and the progressive Institute on Taxation and Economic Policy (ITEP) again squared off – each with representatives from DC flying in to present their views on tax change. These groups don’t always disagree (for instance, they both say that the best way to target low-income tax relief is through an Earned Income Tax Credit, or EITC), but tax triggers were a sticking point at this meeting. Tax triggers, favored by the Tax Foundation and opposed by ITEP, are a slick way of passing expensive tax cuts before you can afford them.

Tax triggers use a formula to try to predict the perfect time for a tax change. To build all of this into the initial legislation and have it make sense three, four, or five years down the road is fantasy. Other states with tax triggers have failed because they didn’t account for population growth or spending needs, or they didn’t tie the triggers to a correct baseline, etc. Every time a state’s revenue falls apart because an unforeseen tax trigger problem, the list of requirements for a “fool-proof tax trigger” gets even longer.

Tying future legislative bodies to imperfect formulas is prone to error (as many other states have found out). But, says the Tax Foundation, aren’t all tax changes applied broadly to an uncertain future? Yes, but they aren’t dynamic. Normal tax changes follow some rules. Sort of like Newton’s First Law of Physics – a regular tax change remains at rest until acted upon by an external force (the legislature). Tax triggers are different. They can be all over the place, suddenly dropping down without approval from the current legislative body.

And on top of being risky, tax triggers are totally unnecessary. If a tax change is desirable by a legislative body once a certain list of criteria is met, there’s no harm in simply waiting until that happens and then voting on a regular tax change. Tax triggers allow lawmakers to “take credit” for passing tax cuts, while avoiding the revenue consequences that sometimes hit years down the line. Many lawmakers who pass tax trigger legislation are not even around to see the budget fallout.

Put another way, tax triggers are like variable rate mortgages. With a fixed rate mortgage, you’re still counting on a certain amount of financial stability in the future when you sign on, but at least you know that the interest rate is staying the same. There’s a lot less room for disaster. On the other hand, (like with a variable rate mortgage) a tax trigger can, well, vary. In both cases you’re making a decision that will impact your future finances, but tax triggers and variable rate mortgages are both a lot riskier and harder to control if they get out of hand.

In Arkansas , tax triggers are especially dangerous. Most tax trigger formulas are already designed as one-way-only budget shrinkers. That means if states miscalculate their formulas and revenue gets too low, its hard to undo. However, automatic tax cuts would be especially difficult to undo in Arkansas where income tax increases require a three-fourths super-majority vote.

Want another reason to avoid unaffordable upper-income tax cuts in Arkansas? Our tax code already heavily favors the wealthy. Arkansans who work low-wage jobs (or those in the bottom 40 percent) pay about twice their share of income to state and local taxes compared to those at the very top (who make more than about $350,000 a year). That’s a fact (see the full explanation from ITEP’s presentation here).

The next Tax Reform and Relief Task Force meetings are today (August 6) and tomorrow (August 7) at the Capitol. You can expect some big decisions to be made then because time is running out for discussion. The group is nearing the deadline for their final report in September.