Five states have implemented a “tax trigger”—a corporate income tax rate reduction conditioned on the jurisdiction meeting a predetermined revenue goal, according to a study recently published by the Tax Foundation. “Tax triggers are gaining popularity because they eliminate some of the uncertainty surrounding changes to the tax code,” the Tax Foundation’s Jared Walczak told Bloomberg BNA’s Che Odom for the Weekly State Tax Report.
While tax triggers may reduce budgeting risks for lawmakers, they will likely create greater uncertainly for taxpayers. The mechanisms the states employ to set off the trigger “are nearly as varied as the benchmarks they establish,” as the Tax Foundation’s report states.
The District of Columbia’s rate reduction is conditioned upon the jurisdiction’s mid-year revenue estimate exceeding the initial revenue estimate, according to the Tax Foundation. In Kansas, the tax cut trigger is pegged at 2.5 percent year-over-year revenue growth. New Hampshire specifies that a rate reduction will take effect when the state’s combined general and education trust fund exceeds $4.64 billion.
It can be difficult to ascertain the status of a state’s budget within a given year. Even if a taxpayer is able to do so, it could be nearly impossible in some years to predict whether a tax trigger threshold will be met.
State tax rates have long been one of the few certainties in an area of law plagued by gray areas and a general lack of guidance. While taxpayers will undoubtedly cheer a tax cut, the trigger provisions make it more difficult to determine what the tax rate will be.
Continue the discussion on LinkedIn: Do the benefits of tax triggers outweigh the uncertainly they create?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
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