Research & Commentary: Tax-Cut Triggers Work When Designed Correctly

Published April 28, 2017

An increasing number of states have been addressing high taxes and limiting spending by using tax-cut triggers. According to the Tax Foundation, 11 states and the District of Columbia have implemented tax-cut triggers. While many of the triggers have worked well as they were originally designed, Oklahoma legislators are now considering legislation to repeal the state’s poorly constructed tax-trigger law.

A tax trigger requires the state government to give refunds or tax credits or reduce certain tax rates if tax revenue reaches certain benchmarks. The idea is that government should not be allowed to keep excess tax revenue if it has sufficient funds to run the state. Tax triggers have become increasingly popular because they allow legislators to pass tax cuts without the fear or a huge revenue shortfall.

Tax triggers represent good tax policy and help lower taxes, but when crafted improperly, as the one in Oklahoma was, they can cause serious problems. In 2014, Oklahoma lawmakers passed legislation that mandated if general revenue projections for 2016 exceed projections for the general fund made for 2014, the state’s top individual income tax rate would be cut from 5.25 percent to 5 percent. Two years later, if revenue exceeded projections again, the rate would fall from 5 percent to 4.85 percent.

Scott Drenkard and Jared Walczak of the Tax Foundation argue Oklahoma’s tax trigger serves as an example of some of the flaws a trigger law can have. They argue Oklahoma’s trigger is poorly designed because the trigger is based on the balance of the general revenue fund instead of growth in the total budget. This allows the legislature to choose how to allocate tax dollars, thereby manipulating the amount in the general fund. As a result, total tax revenues have increased in Oklahoma, yet the increase in general revenue appears to be much lower.  

Oklahoma’s mistake shouldn’t scare other states away from this important reform, however. When constructed properly, tax triggers are an effective way to bring down tax rates responsibly. At the beginning of 2015, Massachusetts cut its personal income tax rate from 5.2 percent to 5.15 percent. Next year, Oregon taxpayers will receive around $402 million in tax credits, approximately 5.6 percent off their individual state income taxes. North Carolina businesses will receive a cut in their corporate income taxes in 2016. Each of these tax cuts was made possible by tax triggers.

One of the main barriers to tax-trigger legislation has been a reluctance of state legislators to accept automatic cuts. New Hampshire successfully worked around this problem when it added a tax trigger in a recent budget compromise by including a stipulation that the tax trigger could be rescinded by a vote of the legislature, if needed.

Walczak argues that even a failure to reach trigger thresholds demonstrates how a trigger can work properly. “When a budget shortfall prevents a tax cut from going into effect, that’s a success—not a failure—of triggers, and should give other states confidence that triggers do what they’re intended to do,” wrote Walczak.

Oklahoma’s tax trigger should be used as a cautionary tale against implementing tax triggers without a proper revenue threshold, not against triggers as a whole. Reducing the tax burden on individuals and businesses should be a goal for every state, and tax triggers are one way to accomplish that important task.

The following documents examine tax triggers and efforts to create tax-expenditure limits in greater detail.

Designing Tax Triggers: Lessons from the States
This paper by Jared Walczak of the Tax Foundation reviews the design of existing state tax triggers and suggests a framework for analysis, distilling the many structural variations into four broad categories: benchmarks, baselines, exclusions, and mechanisms. It then offers some preliminary observations on optimizing the design of tax triggers to achieve intended legislative purposes.

Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

North Carolina Tax Revenue Exceeding Expectations Following Tax Cuts
The Tax Foundation argues North Carolina’s $400 million budget surplus is a result of its corporate tax decrease and spending restraints. Tax revenue exceeded expectations, probably as a result of increases in business incomes.

‘Triggers’ Cut State Taxes; But Are They Good Policy?
Elaine S. Povich of Pew Trusts examines tax triggers in several states and how these triggers affect state budgets.

Policy Tip Sheet: Spending Reforms
The Heartland Institute outlines several reforms state legislators can undertake to address spending problems, including privatization, tax and expenditure limits, and retirement reforms.

What Is the Evidence on Taxes and Growth?
In this Tax Foundation study, William McBride examines the effects of tax policy on economic growth. He finds the literature on the topic demonstrates long-term economic growth is to a significant degree a function of tax policy. If governments seek to spur investment, he writes, they should lower taxes on the earnings of capital. If they seek to increase employment, they should lower taxes on workers and the businesses which hire them. The report also includes a discussion of the effects of progressive tax systems.

America Will Pay More in Taxes in 2015 than it Will Spend on Food, Clothing, and Housing Combined
Americans will pay $3.3 trillion in taxes to the federal government and an additional $1.5 trillion to state and local governments in 2015, notes Kyle Pomerleau of the Tax Foundation. “America’s total tax bill of $4.8 trillion is about 31 percent of the nation’s total income. This is a significant amount and is more than America will spend on food, clothing, and housing combined,” he writes.

State Budget Reform Toolkit
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.

Keep an Eye on the Trigger Mechanism in Oklahoma’s Tax Cut
Scott Drenkard of the Tax Foundation discusses Oklahoma tax cut trigger and suggests possible improvements.

State and Local Spending: Do Tax and Expenditure Limits Work?
This empirical analysis by Benjamin Zycher of the American Enterprise Institute applies data from 49 states (excluding Alaska) over the period 1970–2010 to the empirical question of the effectiveness of TELs, which display a wide variety of features across the states.

Tax and Expenditure Limits for Long-Run Fiscal Stability
Emily Washington and Frederic Sautet of the Mercatus Center examine how states can correct for the inflexibility inherent in state expenditure systems to respect taxpayers’ desires for government services over time. Although they are not a perfect solution, binding TELs prevent policymakers from increasing state spending beyond voters’ willingness to pay for government services, the authors argue.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at

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