State Tax Revenue: Tax Cuts, Budgets, and Tax Triggers

State taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reductions have been a resounding theme in recent years, with 23 states reducing their top marginal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source rates since 2021. The 2026 legislative sessions have continued the trend, with Arkansas, Georgia, South Carolina, Utah, and West Virginia all enacting income tax cuts in 2026 (and Missouri sending the question to voters).

In addition to passing rate reductions this spring that are retroactively effective as of January 1, 2026, Georgia, South Carolina, and West Virginia are also planning further into the future with tax triggers to continue lowering rates over time. But not all tax triggers are created equal, and their design can set states up for success or failure in their tax reform goals. This post walks through tax trigger best practices to see where these three stack up.

The Basics of Tax Trigger Design

A tax trigger, just like it sounds, is a mechanism by which reaching a certain revenue goal triggers a change—usually a reduction—in a tax rate. While tax triggers vary widely between states, they contain several common elements: baselines, benchmarks, exclusions, and implementation mechanisms. The choices states make about these elements determine how effective their tax trigger will be.

Baseline: The measure of revenue against which increases are compared. General fund revenue is the most common, although some states use revenue projections, rather than actual collections.

Benchmark: The amount of revenue growth a state must see to trigger a tax reduction. This amount can be set in terms of nominal dollars or as percentage growth. Ideally, benchmarks should be set against an established baseline, not year-over-year growth.

Exclusions: Even though benchmarks usually look at certain revenue goals, states differ in whether their trigger will dedicate all or just a portion of that new revenue to tax relief. Exclusions are generally meant to retain some portion of the new revenue for state collections, even after adjustments like inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin or population change—which seek to maintain revenue neutrality across years.

Implementation mechanisms: Tax triggers may also require an identical and prescribed rate change with every triggered reduction, or have the size of the rate reduction depend on the size of the revenue increase. Either approach can be effective if the rest of the trigger framework is well-designed.

Some tax triggers require revenue increases to happen by a certain date or limit the total number of reductions that can be triggered, while others provide an open-ended timeline. Tax triggers linked to specific years risk stalling long-term reform if benchmarks are not achieved in a single year, while the benchmarks established for open-ended triggers can erode in value over time. An ideal tax trigger design would avoid requiring benchmarks by specific years, while also employing inflation indexingInflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in nominal dollars, rather than rates, slowly lose value. and desired exclusions to ensure that legislators’ reform intentions stay strong over time.

Georgia Attempts Caution but Falls Short

Georgia has had a tax trigger mechanism on the books for several years to lower the income tax rate. HB 463, signed by the governor on May 12th, increases the size of each rate reduction and newly applies the trigger to raising the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. and personal exemption. Under the proposed system, the income tax rate can fall to as low as 3.99 percent; the standard deduction can rise to as high as $18,000 for single filers; and the personal exemption can grow to $6,000.

The income tax rate decreases annually by 0.125 percentage points (increased from the former 0.10 percentage points) beginning in 2027 if all three of the following conditions are met:

The revenue estimate for the following fiscal year must be at least 3 percent above the present year’s estimate.
The prior fiscal year’s net revenue collection must be higher than each of the previous three years’ collections.
The Revenue Shortfall Reserve must contain more than the projected decrease in state revenue that would occur under the planned tax decrease.

If one or more of these conditions are not met, the reductions are delayed by a year. Having three requirements may seem like an extra cautious trigger mechanism; however, the above requirements do not meaningfully connect tax cuts to the state’s ability to afford them. Including revenue projections in the trigger means reductions might be delayed in years when the state’s actual revenues far outpace estimates. More importantly, Georgia’s changing baseline of past years’ revenue can trigger a reduction in the years following a recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years., since those revenues are lower than historical norms and easier to surpass. The same changing baseline can disregard gradual growth, delaying cuts in years the state can afford them.

For a more effective mechanism, lawmakers should consider setting a dollar amount benchmark (adjusted for inflation), with reductions triggered when revenues surpass that benchmark by a specified percentage. The state can include an annual growth factor above inflation, if so desired. This system promotes revenue stability—or allows room for revenue growth, if lawmakers opt for a growth factor above inflation—while avoiding the mistakes of cutting in lean years or delaying cuts in prosperous ones.

South Carolina’s Reliance on Projections Is Problematic

While Georgia combined revenue projections with actual collections, South Carolina’s H 4216—recently signed by Gov. McMaster (R)—relies only on projections. This poses an issue for responsible rate reductions.

H 4216 first retroactively reduces the top marginal individual income tax rate to 5.21 percent (down from the current 6.00 percent) as of January 1, 2026. Under the tax trigger, the top marginal income tax rate will lower if the projection for individual income tax revenue collections for the coming year increases by five percent over the projection for the current year (not counting money credited to the Trust Fund for Tax Relief).

Basing tax reductions on projections alone means South Carolina could face tax cuts in a year where projections looked good, but actual collections dropped below those expectations, due to causes ranging from an unexpected recession to a natural disaster. And as with Georgia, the changing baseline creates dual issues: discounting gradual growth and thus delaying affordable cuts, or counting a post-recession rebound as growth and cutting when the state cannot afford it.

An unchanging baseline (adjusted for inflation) and a benchmark rooted in collections, rather than projections, would allow South Carolina lawmakers to see the responsible rate reductions they intend to see.

West Virginia’s Trigger Nails the Basics

Gov. Morrisey (R) signed SB 392 in March, which reduces each of the state’s marginal income tax rates—with the top rate lowering from 4.82 to 4.58 percent—retroactive to January 1. The law will further lower income tax rates in each year in which general fund revenues increase past the unchanging baseline of inflation-adjusted 2019 general fund revenue. Rather than prescribing a specific rate reduction for those years, the Secretary of Revenue will reduce all marginal income tax rates to absorb the entirety of the revenue increase—with a limit of a 10 percent decrease in rates in any given year.

This trigger embraces good design principles: it chooses an established baseline year and adjusts its benchmark for inflation. The flexibility of the size of the rate decrease also serves the state well, allowing larger cuts in years where more revenue is available. However, West Virginia should consider adding a provision requiring that the state’s rainy day fund reach a certain funding level before further rate reductions are triggered. If needed down the road, lawmakers could also consider adding a growth factor to the baseline to help this trigger stay sustainable in the long term.

Bonus: Missouri Declares Tax Trigger Intentions, Takes Out Details

Missouri’s HJR 173, which was recently passed by both houses and will go to voters in the fall to amend the state constitution, aims to eliminate the state’s income tax by 2032 through sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base expansion.

While previous versions of this resolution outlined a specific mechanism for rate reductions, the final language simply creates a placeholder for such mechanisms and requires the legislature to design one if voters approve. If and when they do, lawmakers should use an unchanging baseline year, adjusted for inflation; look at actual revenues, rather than projections; and fund their rainy day fund in the process. Further, lawmakers must take care that the proposed sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. expansion includes only final consumer services—not business-to-business transactions. Otherwise, these base changes could cause tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action., leading to higher prices and lower wages.

Design Makes a Difference

Just as using a crescent wrench that is too large will not loosen a small bolt, relying on a flawed tax trigger will not guarantee rate reductions at the right times. A well-designed mechanism, however, can be a highly valuable tool for lawmakers seeking both tax reform and revenue stability. States should embrace established baselines adjusted for inflation, use collections instead of projections as benchmarks, and prioritize contributions to their rainy day funds.