State Lawmakers Call for Constitutional Convention

Testimony on SCR 134: Balanced Budget Amendment

Jason Bailey, Director, Kentucky Center for Economic Policy

Thank you Mr. Chairman for the opportunity to speak on this resolution. My name is Jason Bailey, and I am Director of the Kentucky Center for Economic Policy.

The amendment to the U. S. constitution that SCR 134 supports would lock away a key tool the country needs to address economic downturns, and would be a barrier to the country’s long-term growth and prosperity.

When recessions hit, deficits increase for two reasons. First, tax collections fall; second, spending automatically and temporarily goes up for programs like unemployment insurance and nutrition assistance because more people qualify. So-called “automatic stabilizers” like unemployment insurance are designed to provide assistance to people who have lost jobs and income due to the recession, and to act as a counter-cyclical force to inject demand in an economy where consumer spending and private business investment have fallen.

A balanced budget amendment, by requiring that outlays be no greater than receipts every year no matter the economic conditions, would make recessions much more severe. Take the recession we are just now coming out of.  If this amendment had been in effect in 2009, Congress would have had to abolish every discretionary spending program (including everything from Head Start to roads to the National Institutes of Health, as well as the entire national defense budget), and would still need another several hundred billion dollars from programs like Social Security and Medicare in order to balance the budget. That would have led to massive job and income loss and deepened what was already the biggest downturn since the Great Depression.

These impacts are why in 1997 more than a thousand economists, including 11 Nobel Prize winners, signed a statement opposing a balanced budget amendment.1 A 2003 survey of members of the American Economic Association, the main professional organization of economists, found that 90 percent agreed with the statement, “If the federal budget is to be balanced, it should be done over the course of the business cycle, rather than yearly.”2

The super-majority requirements in SCR 134 to suspend the balanced budget requirement would allow a small minority to play a game of chicken with the entire economy—extracting special favors and increasing rather than decreasing the chance of default on the debt. The structural biases in the amendment against ever raising revenue would make it very difficult to close tax loopholes that emerge from corporate tax evasion, and would keep us from being able to make the investments in education, infrastructure and other areas that are needed to grow our economy.

We need good, constructive conversation about the relationship between the budget and our economic well-being. At the moment, our biggest concern should be the jobs deficit facing the country, which we feel deeply here in Kentucky with a 10.3 percent unemployment rate. Reducing the short-term budget deficit now–at a time of fragile economic recovery–would make that problem much worse.

Large long-term budget deficits are an important issue to address for our future. But by far the biggest task there is the need to address the unsustainable growth of private health care costs, which squeeze the entire economy in addition to increasing the budget deficit. Additional rounds of health care reform are needed to make our health system both more effective and more affordable. We’ll also need plans that address revenue needs–including scrutinizing the $1 trillion in tax expenditures–and re-examine defense and discretionary spending while making sure at the same time we are making the investments that will grow our economy and improve the quality of our lives.

I urge you to reject this resolution and help lead a needed conversation about real ways to secure our economic future.

Thank you for the opportunity to testify today.

Testimony on SCR 134 Balanced Budget Amendment.pdf

  1. http://www.ombwatch.org/files/bba/econ.html
  2. Dan Fuller and Doris Geide-Stevenson, “Consensus among Economists Revisited,” Journal of Economic Education, Fall 2003, pp. 369–387 Testimony on SCR 134 Balanced Budget Amendment.pdf

Paul Budget Would Cut $1 Billion from Education in Kentucky

classroomSenator Rand Paul’s federal budget proposal would cut approximately $1 billion on an annual basis from education in Kentucky, creating a big hole in the K-12 budget while reducing support for higher education, vocational education and adult education. And Paul’s elimination of federal education programs make up only 16 percent of the $500 billion he would cut out of the federal budget.

Paul Budget Fact Sheet.pdf

Testimony on HB 182: Payday Lending

Testimony on House Bill 182–Limiting the Interest Rate on Payday Lending to 36 Percent

House Banking and Insurance Committee, Kentucky General Assembly

February 16, 2011

Melissa Fry Konty, Ph.D.

Research and Policy Associate, Kentucky Center for Economic Policy

Good morning.

Thank you for giving me the opportunity to speak with you. My name is Melissa Fry Konty. I am a Research and Policy Associate at the Kentucky Center for Economic Policy.

In 2008, Kentuckians paid upwards of 400 percent APR on an estimated three million payday loans, totaling approximately $158 million in predatory loan fees.1

When we say “predatory fees” we refer only to those fees paid by borrowers who take out five or more loans in a year: those borrowers who are stuck in the debt trap. The fees associated with these repeat loans are considered predatory, as they are collected as the result of a business model built on people’s inability to repay a loan with such a short term. Trapped borrowers incur a new set of fees every 14 days to borrow the same principal amount.

According to the Commonwealth’s new database, 83 percent of Kentucky’s payday loans from April 30 through September 30, 2010 went to consumers who took out five or more loans during that five month period. Just 2.5 percent of payday lending revenue was generated by customers who took out only one loan during that same five month period. In total, from January through September 2010, 182,159 people took out 1.6 million loans for an average 8.6 loans per borrower. These borrowers paid more than $80 million in fees.2

High payday lending fees drain resources from communities large and small across the Commonwealth. Sixty-four percent of payday lenders in Kentucky are nationally owned and their profits leave the state. Nine of the 10 largest payday lenders in Kentucky are out of state companies.

Some suggest that a rate cap will drive payday lenders out of business and lead to job loss in the state. But threats of job loss are highly exaggerated. Turnover in the payday loan industry is consistently high, upwards of 60 to 80 percent annually.3 In some cases, approximately 50 percent of turnover for storefront managers and employees occurred within the first six months of their hire date.  Moreover, ending 400 percent APR does not end payday lending, it simply means that these companies can no longer charge exorbitant interest rates for these loans.  As has happened in other states, they certainly have the choice to keep their doors open by offering payday loans at 36 percent and by marketing other products and services that comply with Kentucky’s common sense usury laws.

In a recent poll of Kentucky’s registered voters, 73 percent of citizens across the state said they want a 36 percent rate cap on payday loans. Even when we mention the possible loss of jobs in the payday industry, a clear majority of voters support the 36 percent rate cap.

The state’s database tracking information about the use of payday loans has not curbed the debt trap from predatory payday lending, but it has confirmed that one exists. Only a return to a 36 percent rate cap can stop predatory payday lending in Kentucky. We urge you to pass House Bill 182 out of committee and to the House floor.

Thank you.

Testimony on HB 182 Payday Lending.pdf

  1. Kentucky Coalition for Responsible Lending. 2010. The Debt Trap in the Commonwealth: The Impact of Payday Lending on Kentucky Counties. http://kyresponsiblelending.wordpress.com.
  2. These figures include historically loaded transactions for January through April 29. Payday lenders were not yet using the database so these figures were historically loaded and may be incomplete, but they are the most complete data we have for January 2010 to September 30, 2010. The mean number of transactions (i.e. number of transactions/number of borrowers) is 8.6 for this period.
  3. See, e.g., Advance America 2008 10K at page 28, “As of December 31, 2008, the annual turnover among our center managers was approximately 38 percent and among our other center employees was approximately 94 percent. Approximately 47 percent of the turnover has traditionally occurred in the first six months following the hire date of our center managers and employees,” http://investors.advanceamerica.net/secfiling.cfm?filingID=1047469-09-2196, See also Advance American 2009 10K at 29  “As of December 31, 2009, the annual turnover among our center managers was approximately 29 percent and among our other center employees was approximately 67 percent,” http://files.shareholder.com/downloads/AEA/972414399x0x364298/70BB4044-A6B2-4F3B-8A22-042AF8DF6485/Advance_America_2009_Annual_09APR2010.pdf.

Proposed Cap on Payday Interest Rates Turned Down

Farmer’s High-Risk Overhaul Creates Imbalance in Kentucky’s Tax System

New Report: Farmer’s High-Risk Overhaul Creates Imbalance in Kentucky’s Tax System

Shift to Consumption-Based Tax System Would Result in Narrow, Upside-Down Tax Structure

A new report analyzes Rep. Bill Farmer’s tax reform proposal and shows that a shift to a consumption-based tax system in Kentucky would harmfully narrow the tax base and turn responsibility for paying taxes upside-down.

Among the report’s findings are that the poorest 20 percent of Kentuckians would pay an average of $382 more in taxes under Farmer’s House Bill 196, while the wealthiest one percent of earners would receive an average tax cut of $27,851. The report’s distributional analysis was conducted by the Institute on Taxation and Economic Policy, a non-partisan research organization based in Washington, DC.

“We need comprehensive tax reform in order to raise the revenues Kentucky needs to move forward, assure those revenues grow in line with our needs in the future , and do so in a way that maintains balance in who pays,” said Jason Bailey, Director of the Kentucky Center for Economic Policy (KCEP). “But plans like Farmer’s that eliminate Kentucky’s income taxes fail on all those counts.”

“Expanding an outdated and too-narrow sales tax base is an important part of needed tax reform, and the Farmer plan appropriately considers ways to do that,” said Melissa Fry Konty, Research and Policy Associate at KCEP. “But by also eliminating all of Kentucky’s individual and corporate income taxes, it shifts the state to narrow reliance on a single tax. That flies in the face of good tax reform.”

The report notes significant risk with House Bill 196 because of a questionable impact on revenue. Many items in the expanded sales tax base have not been taxed before, and exact revenue results are uncertain. Many newly-taxed items would also likely be subject to subsequent pressure to exempt them, which would lower needed revenue.

While supporters of eliminating income taxes sometimes claim economic development benefits, many studies conclude that all other things being equal taxes make little difference in economic development. States like North Carolina with greater reliance on progressive income taxes have seen substantial economic growth in recent years, and corporate income taxes make up a very small share of the cost of doing business.

“Economic development depends much more on the environment for growth including the strength of the education system, the condition of infrastructure and the quality of life in a state,” said Bailey. “That requires adequately-funded public systems and services.”

The report can be accessed here.

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The Kentucky Center for Economic Policy (KCEP) was founded in 2011 with the purpose of conducting research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. The Center is an initiative of the Mountain Association for Community Economic Development (MACED) and is supported by foundation grants and individual donors.

Farmer’s High-Risk Overhaul Creates Imbalance in Kentucky’s Tax System

House Bill 196, sponsored by Representative Bill Farmer, proposes to overhaul Kentucky’s tax system by eliminating income taxes on individuals and corporations while greatly expanding the sales tax base. The bill is an example of a shift to a consumption-based tax system. Kentucky needs to reform its tax structure, and HB 196 considers ways to broaden an outdated and too-narrow sales tax base. But taken as a whole, HB 196 is a risky and troubling experiment. It turns the tax structure upside down by dramatically shifting responsibility for funding government away from high-income Kentuckians. And by eliminating the income taxes that currently make up 43 percent of General Fund revenue, the bill would create imbalance in our revenue system that could harm our ability to invest in the public structures essential to future prosperity.

House Bill 196.pdf

KY Passing Up Feds’ $90 Million Bonus Bucks for Jobless Workers?

Kentucky to Forego $90 Million for Jobless Workers Unless Unemployment Insurance Updates Made by August

New Report: Kentucky to Forego $90 Million for Jobless Workers Unless Unemployment Insurance Updates Made by August

Last Chance to Modernize Unemployment Program Before Federal Money Disappears

A new report shows that Kentucky will miss out on $90 million in federal incentive money unless it acts by August 2011 to make changes that modernize its unemployment insurance system.

The bonus money was made available as part of the federal Recovery Act. In the last two years, 38 states have acted to receive at least partial incentive monies, and 32 states have made changes to access their full incentives.

“Kentucky’s high unemployment rate makes more visible the serious holes in our unemployment insurance system,” said Jason Bailey, Director of the Kentucky Center for Economic Policy. “The Recovery Act provided incentive money for states to take action to make unemployment insurance better reflect the reality facing workers today. Kentucky has not yet taken those actions, and now is the last chance to access bonus money for doing so.”

Modernization reforms target a portion of low-wage workers, women, part-time workers and the long-term unemployed. They take into account significant changes in the labor market since unemployment insurance was created.

Kentucky passed legislation in 2010 to address issues related to the solvency of its unemployment insurance trust fund, but decided to put off making a decision about unemployment insurance modernization until 2011. Without action in the current General Assembly, Kentucky will forfeit these monies.

“In the current economic downturn, only one in four unemployed workers collects state unemployment benefits in Kentucky,” noted Bailey. “That ranks Kentucky 47th among the states—one of the lowest rankings in the country. We must begin addressing ways that unemployment insurance fails to assist many who have lost their jobs.”

Kentucky has the eighth-highest unemployment rate among the states. The report notes that of the seven states with higher unemployment rates, all but one have acted to receive full incentive monies by modernizing their program. While Kentucky has had to borrow from the federal government to address the deficit in its unemployment insurance system, many of the 31 other states that have also had to borrow decided to enact modernization at the same time.

The report, which provides more detail about modernization options, can be accessed here.

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The Kentucky Center for Economic Policy (KCEP) was founded in 2011 with the purpose of conducting research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. The Center is an initiative of the Mountain Association for Community Economic Development (MACED) and is supported by foundation grants and individual donors.

Kentucky Will Forego $90 Million for Jobless Workers Unless Unemployment Insurance Updates Made by August

Kentucky stands to miss out on $90 million in federal incentive monies unless it enacts measures by August 2011 to modernize its unemployment insurance system. Those changes would increase access for a portion of low-wage workers, women, part-time workers and the long-term unemployed. In the last two years, 38 states have acted to receive at least partial incentive monies, and 32 states have made changes to access their full incentives. Kentucky did not include “unemployment insurance modernization” in changes enacted in a 2010 special session, and remains one of the holdout states. Action on this issue would provide assistance to Kentucky’s struggling families, inject additional dollars into a sluggish economy and begin to address major holes in the state’s unemployment insurance system.

Unemployment Modernization.pdf