National report shows negative impact of phased-in tax cuts in other states
Two new national reports released Monday show that “triggered” and phased-in tax cuts over a number of years, like Michigan lawmakers passed as part of the roads plan and have recently proposed on the state income tax, are poor fiscal policy that could harm the state’s future ability to provide critical services for its residents, businesses and communities. Using a phase-in or revenue trigger to pass tax cuts at a time when they clearly aren’t affordable or palatable has already wreaked havoc in other states, according to the Center on Budget and Policy Priorities.
Phasing in State Tax Cuts Doesn’t Make Them Fiscally Responsible concludes that this method of enacting tax cuts often leads 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 trade-offs and consequences of these proposals.
While the aforementioned report is a harbinger of Michigan’s future problems if a phased-in income tax cut is passed, the Center’s other report released today, Revenue “Triggers” for State Tax Cuts Provide Illusion of Fiscal Responsibility, specifically notes Michigan as a bad example at present. As part of the 2015 roads plan, Michigan already passed a different revenue-triggered tax cut that will not take effect until 2023. That’s two national reports on two bad tax policies, and the Michigan Legislature is pursuing them both.
“The ink is barely dry on the triggered income tax cut and now lawmakers want a phased-in cut as well. A 50-year fiscal threat is still a threat. Our schools, our roads, our police and fire services, our courts and our healthcare all depend on state revenues, and are all in danger with any cut to the state income tax,” said Gilda Z. Jacobs, president and CEO of the Michigan League for Public Policy. “Unaffordable tax cuts threaten our state’s future by eroding the foundations of thriving communities, and dragging them out over time just means chipping away at the budget with painful cuts year after year.”
Eleven states 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. Kansas’ income tax cut and subsequent budget mess has been getting some attention in Michigan lately, and Arizona and North Carolina have had similar problems. These states have had to make drastic cuts to their budgets, including slashing public education funding, money for colleges and universities, and road funding. Mississippi just enacted a phased-in income tax cut in 2016 and Moody's has already given the state a negative credit outlook.
Michigan is now poised to make the same mistake, with two proposals to cut and repeal the Michigan income tax, including one that will happen over more than 50 years.
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, phased-in cuts promote the shifting of tax responsibilities from wealthy residents to less-affluent ones. Income taxes require more of wealthier residents than middle-to-low income families, while the opposite is true for other major state taxes, such as sales and ex-
cise 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 struggling workers.
Delayed tax cuts offer no meaningful benefit over tax cuts that take effect immediately. There are no proven practical or economic benefits of phasing in tax cuts.
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.
Proposals to phase in deep tax cuts are often based on the incorrect claim that states can cut taxes significantly without undermining their ability to continue funding services as long as they cut taxes gradually over time. This claim ignores the fact that the cost of providing a given level of services rises over time due to inflation, population growth, and other factors. Phasing in tax cuts offers the appearance of prudence even when the tax cuts are fiscally irresponsible. States considering phased-in tax cuts should evaluate carefully the cost and 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.
Phasing in State Tax Cuts Doesn’t Make Them Fiscally Responsible and Revenue “Triggers” for State Tax Cuts Provide Illusion of Fiscal Responsibility are available on the Center on Budget and Policy Priorities website www.cbpp.org.
The Michigan League for Public Policy, www.mlpp.org, is a nonprofit policy institute focused on economic opportunity for all. It is the only state-level organization that addresses poverty in a comprehensive way.
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