MEDIA RELEASE: ‘Triggers’ for State Tax Cuts Provide Illusion of Fiscal Responsibility but in Reality have Hurt North Carolina

Raleigh (Feb. 6, 2017) — State lawmakers who want to pass tax cuts at a time when they clearly aren’t affordable are increasingly using “triggers”—tax cuts that take effect at a future date, contingent on state revenues reaching a certain level or growth rate—and phasing in cuts over a number of years, rather than trying to enact them all at once. While these methods may, at first glance, seem fiscally prudent, they actually are poor fiscal policy that could harm the state’s future ability to provide critical services for its residents, according to two new reports from the Center on Budget and Policy Priorities.

Revenue “Triggers” for State Tax Cuts Provide Illusion of Fiscal Responsibility and Phasing in State Tax Cuts Doesn’t Make Them Fiscally Responsible conclude that these methods of enacting tax cuts are often fiscally irresponsible—leading to serious structural problems in state revenue systems, forcing harmful cuts in public services, increases in other taxes, or both. They also let state lawmakers avoid accountability, allowing them to avoid the public scrutiny that would accompany a public debate about the tradeoffs and consequences of these proposals.

“Schools, roads, courts, and health care are paid for, in large part, by state tax revenues,” said Alexandra Sirota, Director of the Budget & Tax Center. “Unaffordable tax cuts threaten our state’s future by eroding the foundations of thriving communities. Enacting them over time or by waiting for meager revenue growth before they can take effect does not change that fact.”

North Carolina voted to phase-in corporate income tax rate cuts, making it one of 11 states that have enacted large, phased-in cuts in corporate or personal income taxes since 2011 that will cost a combined $8 billion a year once fully implemented.

The final reduction to the state corporate income tax rate in North Carolina scheduled with legislation passed in 2013 went into effect on January 1, 2017, dropping the rate from 4 to 3 percent. That rate reduction went forward despite the significant unanticipated need to rebuild in Eastern North Carolina post-Hurricane Matthew and the ongoing unmet needs in classrooms and communities across the entire state.

Triggered and phased-in tax cuts have caused serious financial problems in some states that have adopted them and will likely continue causing problems as they are phased in or adopted in additional states, because:

• Policymakers usually do not have access to up-to-date, multi-year forecasts of how much states expect to spend in the year a phased-in tax cut is fully in effect or an estimate of total revenues available at that time. Such forecasts could be done in most cases, but they are almost never done.
• By making income tax cuts easier to enact, delayed effective dates promote the shifting of tax responsibilities from wealthy residents to less-affluent ones. Income taxes require more of wealthier residents than middle- and low-income families, while the opposite is true for the other major state taxes, such as sales and excise taxes. As a result, when states cut income taxes and increase other state taxes, they shift the cost of state services away from the rich and toward the middle class and poor.
• Delayed tax cuts – with or without triggers attached – offer no meaningful benefit over tax cuts that take effect immediately. There are no proven practical or economic benefits of phasing in tax cuts or waiting for revenue growth to trigger them.
• Delayed tax cuts are politically expedient because they enable policymakers to claim credit for cutting taxes while avoiding accountability for the consequences.
• Delayed tax cuts are hard to reverse once enacted. While it would require only a simple majority of the legislature to cut taxes and make corresponding deep cuts to colleges and other things paid for with state tax dollars, supporters of reversing these tax cuts in some states would have to persuade supermajorities to enact restorations. This makes it even more important that lawmakers and voters consider these proposals knowing all the facts and potential consequences.

“Phasing in policy changes over time can be prudent in some cases, but phasing in deep tax cuts can create major structural problems in state revenue systems, weakening states’ ability to support a strong education system and other essential public services that provide a foundation for future prosperity,” said Eric Figueroa, senior policy analyst and lead author of the Phase-in report.

Revenue “Triggers” for State Tax Cuts Provide Illusion of Fiscal Responsibility and Phasing in State Tax Cuts Doesn’t Make Them Fiscally Responsible are available on The Center on Budget and Policy Priorities website www.cbpp.org.

FOR MORE INFORMATION, CONTACT Alexandra F. Sirota, Budget & Tax Center Director, at (919) 861-1468 or alexandra@ncjustice.org; or Cedric Johnson, Budget & Tax Center Policy Analyst, at (919) 856-3192 or cedric@ncjustice.org.