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Growing Trend to Phase in or Trigger State Tax Cuts Is Irresponsible, Skirts Accountability

Policymakers in many state capitols are pushing irresponsible plans for automatic, deep, and costly income tax cuts to be implemented several years after their enactment — obscuring the effect of tax changes that primarily benefit wealthy households and corporations but ultimately damage most people and communities.

Commonly described as “phase-ins” or “triggers,” these automatic cuts have become increasingly popular with tax-cutting proponents. While details differ, they have the same outcome: they set the stage for serious harm to schools and other vital services, reduce electoral accountability for legislative decisions, and funnel the lion’s share of benefits to wealthy households and corporations. And with revenues ostensibly in surplus in many states — buoyed by one-time federal COVID relief and the economic recovery it helped ensure — there’s even more cover to hide the long-term damage of gutting or eliminating state income taxes.

At least six states — Kansas, Louisiana, Missouri, Ohio, Oklahoma, and Wisconsin — are considering plans that would enact new personal or corporate income tax cuts with some staggered approach, and at least five more — Georgia, Indiana, Iowa, Nebraska, and North Carolina — are looking at accelerating the phase-in of already scheduled cuts. In two more states — Kentucky and West Virginia — plans to either create new staggered tax cuts or speed up existing ones are already over the finish line this legislative session.

This growing trend comes on top of eight states where personal or corporate income tax cuts are now in the process of phasing in, including a swath of new cuts enacted over the past two years. And in another five states, trigger mechanisms already on the books could lead to additional tax cuts, for example in Michigan, where a rigid formula that past policymakers enactedd is finally coming home to roost.

Broadly, the plans come in one of two forms: tax-cutting plans that simply phase in a specified set of rate cuts, often swapping a graduated rate for a flat tax, or tax cuts that lawmakers design to only take effect — or trigger — if certain revenue targets are hit. Increasingly, including in West Virginia’s just-enacted plan, triggered tax cut proposals also include “march to zero” provisions designed to eventually eliminate income taxes entirely.

While proponents often position phase-ins and triggers as the responsible alternative to immediate cuts, they simply make the harm someone else’s problem. States’ standard budget window is one to two years. By pushing the implementation of tax cuts outside that window, lawmakers behind these plans can partially mask the full toll they’ll eventually enact. For example, if the income tax phaseout plan that West Virginia policymakers just approved were in full effect today, the state would be facing a $2.2 billion budget hole, or about what it now spends on all public education.

The precise scope of the long-term damage to vital services is also impossible to foresee, since state policymakers often lack access to the up-to-date information and detailed forecasting they would need to make such precise budgetary projections.

For example, as a 2017 CBPP report detailed:

  • Ten states enacted triggered income tax cuts over the prior 15-year span without any estimate of the cost to provide existing services over the duration of the tax cut. This left policymakers in the dark as to whether the tax cuts would force cuts in vital services — as most of them eventually did.
  • In at least five of the seven states that adopted revenue-based triggers, the thresholds for tax cuts were almost completely arbitrary — not based on any systematic analysis of the revenue needed to meet residents’ needs.

But we know from experience that the bill will eventually come due, often when states can least afford it, such as after a recession or some other economic shock. In Oklahoma for instance, automatic tax cuts in 2012 and 2016 were triggered during harsh fiscal conditions — in one case during a major budget shortfall and in another before revenues had recovered enough from a recession to reverse prior cuts. And in Massachusetts, a phased-in cut in 2000 coincided with the dot-com bubble burst, when revenues had already started to crater.

The cost of staggered tax cuts also often arrives earlier than expected. That’s because state policymakers have tended to sign gradual, seemingly affordable phased-in cuts into law one year, then return to speed them up a year or two later. Kentucky policymakers, for example, approved legislation in recent weeks to accelerate triggered tax cuts enacted just last year, which by 2025 will have an annual cost of more than what the state spends on all higher education — and could eventually eliminate the state’s income tax entirely, if additional triggers are met.

Phase-ins and triggers also hinder political accountability. Drawing out the implementation of deep income tax cuts allows policymakers to punt their full cost — and harm — divorcing the effects of these plans from their legislative origin. Lawmakers in states with strict term limits may never have to deal with the fallout from lost revenue.

That’s now the case in Michigan. After lawmakers contorted themselves to try and sidestep a pending income tax cut approved in 2015, when none of them were in office and the economy was very different, a triggered tax cut is now poised to take effect. It will drop Michigan’s flat personal income tax rate from 4.25 percent to 4.05 percent this year, at an annual cost of up to $700 million. That’s a huge amount of revenue that Michigan decision-makers could instead be applying to the state’s current needs.

The graduated income tax is the only tax that asks the wealthiest people to pay more of their income than working families and small businesses, just as the corporate income tax is the only state levy well-suited to have big, profitable, multistate corporations pay their fair share. Phase-ins and triggers don’t do anything to alter the results of cuts to such taxes: most of the benefits go to wealthy households and corporations, while working families and communities bear the brunt of the harm.