Pull the trig­ger

Tax cuts based on rev­enue pru­dent

Northwest Arkansas Democrat-Gazette - - EDITORIAL PAGE - DAVID MITCHELL Dr. David Mitchell is an as­so­ciate pro­fes­sor of eco­nom­ics and the di­rec­tor of the Arkansas Cen­ter for Re­search in Eco­nom­ics (ACRE) at the Univer­sity of Cen­tral Arkansas.

Tax re­form is heat­ing up in Arkansas, as the newly cre­ated tax task force is be­gin­ning its meet­ings. While much of the con­ver­sa­tion so far has fo­cused on ex­emp­tions and tax cuts to im­prove Arkansas’ com­pet­i­tive­ness, the task force would be well served to de­vote time and en­ergy on an­other topic: tax trig­gers.

Tax trig­gers pro­vide a pre­dictable, phased-in ap­proach to tax re­form, bal­anc­ing the bud­getary needs of the state with the de­sire for an im­proved tax code.

A tax trig­ger is a cut to the tax rate that only takes place once in­creased tax rev­enue oc­curs. It is a way to phase in tax cuts slowly as tax rev­enue ex­pec­ta­tions are met. In other words, tax cuts are not sim­ply phased in; they are con­tin­gent on reach­ing rev­enue tar­gets.

The use of tax trig­gers is not un­com­mon. In fact, 11 states cur­rently use them. For in­stance, North Carolina, a shin­ing ex­am­ple of state tax re­form, en­acted a trig­ger that would cut the in­come tax rate by 1 per­cent­age point if tax col­lec­tions were above $20.2 bil­lion, and prompt a sec­ond cut if rev­enue in­creased to al­most $21 bil­lion.

Us­ing tax trig­gers rather than sim­ply in­sert­ing a tax cut is im­por­tant for en­sur­ing that the state main­tains its abil­ity to fund es­sen­tial func­tions. Tax trig­gers make cer­tain that the state is still able to fund ed­u­ca­tion, Med­i­caid, po­lice, roads, and other es­sen­tial govern­ment func­tions be­fore tax cuts take place. It would be im­pru­dent to cut taxes with­out hav­ing a spe­cific plan in­volv­ing spend­ing cuts or rev­enue re­place­ment.

It is easy to fore­cast rosy tax rev­enue. But be­lieve it or not, some­times eco­nomic fore­casts are off. There are too many things that can af­fect tax rev­enue, much of which is un­fore­see­able. Some of the things that af­fect tax rev­enue are con­trolled by state govern­ment, but na­tional and in­ter­na­tional de­ci­sions have an im­pact on state rev­enue as well. It is hard to ac­cu­rately pre­dict the im­pact of those is­sues.

But tax trig­gers protect states from the dan­gers of fore­cast­ing. Tax trig­gers mean that if fore­casts are cor­rect, the tax cuts take ef­fect im­me­di­ately. But if fore­casts are off, the tax cuts take ef­fect later. For ex­am­ple, Mas­sachusetts planned to have tax cuts in 2008, but its tax trig­ger did not take ef­fect in that year due to the re­ces­sion. Like­wise, Mis­souri is work­ing to re­duce its in­come-tax rates, but the re­duc­tion will be de­layed by a year since the state’s rev­enue tar­get was not quite reached.

There are also ex­am­ples of ir­re­spon­si­ble tax cuts. When­ever tax re­form comes up, so does the Kansas fi­asco. Kansas adopted very large tax cuts but did not re­duce govern­ment spend­ing to match the tax cuts, or broaden the tax base to re­place lost rev­enue. Kansas also by­passed the use of tax trig­gers, in­stead opt­ing to im­ple­ment the tax cut all at once.

Un­sur­pris­ingly, it had se­ri­ous bud­get prob­lems and put a neg­a­tive con­no­ta­tion on tax re­form in other states.

De­spite the Kansas fi­asco, Arkansas leg­is­la­tors can look to sev­eral other states for mod­els of pru­dent tax re­form. North Carolina is one of the many states (and D.C.) that have low­ered taxes re­spon­si­bly.

Broad­en­ing the tax base and low­er­ing tax rates with the help of tax trig­gers have led to good things hap­pen­ing with North Carolina’s econ­omy. The state is ex­pe­ri­enc­ing growth, and it has avoided the bud­get cri­sis that Kansas is ex­pe­ri­enc­ing. In fact, North Carolina had a bud­get sur­plus in 2015, 2016, and ex­pects one this year.

Tax-re­form dis­cus­sions in Arkansas will no doubt in­clude sim­pli­fy­ing the code by re­duc­ing the num­ber of per­sonal in­come-tax sched­ules, broad­en­ing the tax base by elim­i­nat­ing the wide range of tax ex­emp­tions avail­able to spe­cial in­ter­ests, and low­er­ing mar­ginal tax rates. But the dis­cus­sion is not com­plete if it does not in­clude low­er­ing tax rates re­spon­si­bly with tax trig­gers.

Tax trig­gers are a pru­dent method for phas­ing in tax cuts. Those cuts will make Arkansas more com­pet­i­tive na­tion­ally and in our re­gion. Phas­ing the cuts in based on rev­enue en­sures that Arkansas can meet its obli­ga­tions even in un­cer­tain times. It is the ju­di­cious way to make our state more com­pet­i­tive.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.