Don’t Trust Those Triggers

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

March 27, 2001

Moderates in both parties are in agony over President Bush’s proposed tax cut. They ache to support it, because—let’s face it—cutting taxes is fun. But they understand that a tax cut as large as President Bush has requested would use up all—or more than all—of projected budget surpluses. They also understand that projections are unreliable and that much or all of those surpluses may never actually show up. In their desire both to cut taxes and be fiscally prudent, many are considering enacting a “trigger,” a budget target that would have to be met before tax cuts would take effect. Trigger advocates mean well, but if the road to hell is paved with good intentions, this idea threatens to take the nation to a very hot place.

A trigger would work as follows: Congress would enact tax cuts now to be phased in over several years. But each cut would take effect only if the actual or projected budget surplus exceeded a target in that year or the next year or next few years. The trigger could also be based on the public debt. Such an approach sounds fiscally responsible—no surplus, no tax cut! It is, in fact, an engraved invitation to budgetary chicanery.

This harsh statement is more than prediction. It is history. In the mid-1980s, Congress enacted a trigger calling for automatic spending cuts if targets for projected budget deficits were not met. Neither Congress nor the administration actually wanted to do what had to be done to meet the targets. So they resorted to deceptive practices to avoid pulling the triggers. Here is a partial list:

They adopted absurdly optimistic economic forecasts to overstate revenues and understate spending. They moved spending from one fiscal year to the next to make the first year’s budget meet the targets. Then, when the fiscal year was over, they moved the same spending back from the later year to the earlier year to help meet the targets for the later year. They declared certain spending to be “off-budget” so that it would not count against their targets. And then, when these and other gimmicks failed to prevent deficits, Congress simply abandoned the triggers it had earlier legislated.

Relying on actual, rather than projected, surpluses to trigger tax cuts would preclude certain deceptions, such as rosy scenarios. But reliance on actual surpluses would intensify incentives to mislead in other ways. For example, because taxes count as revenues when received, withholding could be accelerated. Payment of contractual obligations could be delayed a few days. By temporarily cutting spending, tax rates could be permanently reduced. More worrisome than such petty bookkeeping scams is the shift in political power that the existence of tax cut triggers would cause.

Imagine that it is 2005. The last installment of the Bush rate cuts is scheduled to take place in 2006, but only if the surplus is sufficient. So the president—Bush or his successor—sends up a list of spending cuts that appeals to the administration but not to congressional leadership—Democratic or Republican. Congress faces a nasty choice. It can reject the spending cuts and thereby deny people the already-legislated tax cut. Or it can grant cuts it thinks unwise because it fears allowing the tax cuts to lapse.

Quite apart from gimmicks and unintended political power shifts, triggers cannot do the job they are intended to do. The terms of president Bush and 94 percent of the members of Congress expire before the end of fiscal year 2005. More than three-fourths of budget surpluses projected for the next 10 years accrue after the end of 2005. But 84 percent of the 10-year cost of the Bush tax plan results from cuts that would already be in place before the end of 2005. A trigger that prevented all later cuts from taking effect would provide little protection from consequences of tax cuts that events reveal to have been excessive.

These examples are not far-fetched. That triggers encourage budgetary dishonesty and shift political power is historical fact, not forecast. Been there! Done that! And if the budget gimmicks of the 1980s fostered by the painful prospect of cutting expenditures were brazen, those likely to be called forth by the passion to cut taxes will make one’s jaw drop. But there is a real problem—budget surpluses we currently expect may not be realized. There is a simple and direct way to deal with that problem: Wait.

Congress should legislate tax cuts only when surpluses are in hand or, at least, when they are imminent. If the economy performs as well as the Bush administration and many economists expect it to perform, revenues will be sufficient to support large tax cuts. Or the nation may decide to use its bounty to close projected long-term deficits in Social Security and Medicare. Or the nation may confront military emergencies or other contingencies that place unexpected demands on the public sector. In any event, Congress will be better positioned to make a responsible decision when the surpluses are in hand than when they are still in the Bush projections.