States across the country are rethinking tax reform to stay competitive for residents and businesses. Many are exploring ways to phase out personal income, business franchise, and property taxes to attract workers, foster economic growth, and ensure property rights. But doing so requires careful planning to ensure stability and fiscal responsibility.

One of the most important decisions in this process is choosing the right mechanism to trigger tax cuts. 

Two common approaches are revenue triggers and surplus triggers. While both have their merits, surplus triggers are far more reliable and sustainable. They base tax cuts on actual fiscal surpluses rather than optimistic revenue projections and address the core problem of government: spending.

Why Spending Limits and Surplus Triggers Make Sense

Tax reform doesn’t happen in isolation—it needs to be part of a broader strategy to limit government growth and promote fiscal discipline. This is where spending limits come into play. A spending limit ties annual increases in government spending to measurable factors like population growth and inflation. By keeping spending under control, surpluses naturally occur when revenues grow faster than the spending limit, creating the perfect opportunity for meaningful tax cuts.

Here’s why a surplus trigger, paired with a spending limit, is the best approach for phasing out taxes:

1. Stability Over Speculation

Revenue triggers rely on meeting specific revenue targets before tax cuts are implemented. While this sounds straightforward, it assumes continuous economic growth—a risky gamble. If revenues fall short due to economic downturns or other factors, tax cuts may be delayed or reversed, creating uncertainty for taxpayers and businesses.

Surplus triggers, on the other hand, only initiate tax cuts when there are genuine excess funds at the end of the year. This approach ensures that tax relief is stable, reliable, and based on real financial health rather than speculation.

2. Encouraging Fiscal Discipline

A surplus trigger works hand-in-hand with a spending limit, which naturally generates surpluses by controlling government expansion. This ensures that tax cuts are backed by actual savings, not temporary windfalls. Revenue triggers, by contrast, don’t address the root cause of fiscal instability—unrestrained spending. Without limits, even rising revenues can be outpaced by unchecked spending growth, leaving little room for tax relief.

By focusing on spending, surplus triggers encourage long-term fiscal discipline, making tax reform sustainable.

3. Reducing the Risk of Tax Reversals

Revenue-triggered tax cuts can be politically fragile. If revenue growth slows, lawmakers may feel pressured to raise taxes again, undermining the entire reform effort. Surplus triggers avoid this problem by tying tax reductions to actual fiscal conditions. This ensures that cuts are less likely to be reversed, providing certainty for taxpayers and businesses alike.

How Surplus Triggers Work in Practice

A surplus trigger takes the revenue collected above the spending limit at the end of each fiscal year and allocates it toward specific priorities. Here’s a practical example of how this can work:

• 90% of the surplus is directed to a Tax Relief Fund to reduce the income tax rate gradually over time. This fund can also act as a buffer to cover limited spending needs, if necessary. Any leftover funds can go toward paying down debt, further strengthening the state’s financial health.
• The remaining 10% (or less) is left in the general fund or a rainy day fund for unforeseen revenue shortfalls due to a recession, natural disaster, or other reasons. But the focus during those shortfalls should be reducing spending so more money remains for tax relief when people tend to be hurting the most.

By splitting surplus funds between tax relief and rainy day funds, states can provide immediate benefits while laying the groundwork for future prosperity.

Flexible, Sustainable Tax Reform

Unlike revenue triggers, surplus triggers don’t lock states into rigid tax cut schedules. Instead, they allow flexibility to adjust the pace of tax reductions based on actual surpluses. This makes a complete phase-out of the income tax achievable within a reasonable timeframe, such as a decade, while ensuring that essential services and fiscal stability are preserved.

When combined with a spending limit, surplus-triggered tax relief delivers significant economic benefits. Lower income taxes increase disposable income for families, encourage consumer spending, and attract businesses looking for a more favorable tax environment. Over time, the resulting economic growth broadens the tax base, generating additional revenue from sales and property taxes to offset the reduced reliance on income taxes.

Research shows that phased tax relief can drive billions in economic growth and create thousands of new jobs. It’s a strategy that not only improves the fiscal health of the state but also enhances the quality of life for residents.

The Bottom Line

Surplus triggers, paired with a spending limit, offer a sustainable and disciplined path to meaningful tax reform. They provide a reliable framework for reducing and eventually eliminating personal income taxes, ensuring that tax cuts are based on real fiscal health rather than speculative revenue growth. By focusing on spending restraint, states can achieve tax reform that is both responsible and transformative, paving the way for economic growth and competitiveness for years to come.

The choice is clear: surplus triggers are the smarter, more stable way to deliver lasting tax relief and fiscal stability.

Texans for Fiscal Responsibility relies on the support of private donors across the Lone Star State in order to promote fiscal responsibility and pro-taxpayer government in Texas. Please consider supporting our efforts! Thank you!

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