A Fiscal Trigger Is Impractical, Unreasonable, and Unnecessary

Recently some Senators have raised concerns about the deficit impact of the pending tax reform bill. Even though the weight of expert opinion strongly suggests the revenue gains from additional growth should erase federal deficit concerns while providing a tidy fiscal windfall to state and local government coffers, some are now suggesting a fiscal trigger in the event the projected revenue gains fail to materialize. While one can appreciate the intentions, the fact remains a fiscal trigger is a terrible idea.

The flaws of the fiscal trigger, whereby taxes would rise if revenues disappointed are many, but let us focus on the biggest. The most obvious is, against what metric would a shortfall be counted? Are the trigger’s proponents willing to embrace a particular estimate for the additional growth and associated revenue gains? Without such a dynamic revenue estimate, the trigger is an illusion.

A second flaw becomes apparent when one observes the U.S. economy has now been expanding since 2009, making this one of the longest, if to date most anemic recoveries in the modern era. Even with the passage of tax reform and other pro-growth policies like regulatory relief and, hopefully, eventually an infrastructure bill, the fact remains a recession sometime in the course of the next 10 years is a very good bet. The simple sad fact is we have still not repealed the business cycle, nor are we likely to do so.

No recession is on the horizon, but another recession hitting while a trigger was in place would create enormous problems. Just exactly how would a trigger operate once a recession hits? Would it lead to an automatic tax hike even as the recession unfolds? And which taxes would be raised automatically? Would the entirety of the Tax Cuts and Jobs Act be automatically repealed, raising the corporate income tax from 20% to 35% even as Congress sought means of launching a recovery?

How would a trigger operate if Congress passed additional tax legislation between 2017 and the date of the recession or just a revenue shortfall? Moreover, is this to be solely a one-way road? What if the revenues come in far above those now projected even with the acknowledged additional growth? Are the trigger’s proponents willing to include in their mechanism an automatic tax cut in such an event, and if so, which taxes would be cut automatically? It is surprising having suffered under the accidental constraints of the Budget Control Act’s limitations in recent years that Congress would consider a similarly unfortunate device.

Even without a trigger, the Tax Cuts and Jobs Act will not be the last tax bill passed for decades to come. Congress will continue to debate tax cuts and tax hikes and tax reforms, and at various points down the road future Congresses will pass subsequent bills large and small. The automatic trigger that everyone should recognize is the one already and always in operation – the fact that future Congresses will act according to the times and circumstances then in evidence. Today’s protectors of America’s fiscal house should recognize they are not the first, and won’t be the last to share those concerns.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.