Kentucky Falls Short in Closing Higher Education Gaps

Kentucky still has a long way to go to meet the ambitious educational attainment goals set by the Postsecondary Education Improvement Act of 1997. In a recent report by the Council on Postsecondary Education, which details the state’s progress toward meeting these goals in 2010-2011, Kentucky fell short in several indicators of the gaps between disadvantaged and other students.

The report examines the progress that has been made toward the state’s education goals for 2020 in 31 performance targets in four priority areas: college readiness; student success; research, economic and community development; and efficiency and innovation.1 Despite progress in some areas, the state is losing ground on several critical student success targets, including: closing the bachelor’s degree graduation rate gaps for lower-income students, closing the associate’s degree graduation rate gaps for lower-income students and racial/ethnic minorities, and decreasing financial barriers to college access and completion.

The graduation gap between low-income and middle-to-upper-income students for associate’s and bachelor’s degrees widened considerably from 2008-09 to 2010-11. The gap in bachelor’s degree attainment rates increased from 10.5 percentage points to 18.4 points.2 For associate’s degrees the gap grew from 3.1 percentage points to 5.8 points.3

Likewise, it is unlikely that the state will make enough progress in closing the achievement gap for underrepresented minority students in the areas of bachelor’s and associate’s degree graduation rates to meet the state’s 2014 intermediary target. While the gap between the bachelor’s degree graduation rates of underrepresented minority students and White and Asian students narrowed slightly between 2008-2009 and 2010-11, the racial achievement gap actually widened slightly for associate’s degree attainment.4

Kentucky is also not making progress in reducing financial barriers to college access and completion, which contribute to these postsecondary degree attainment trends. As noted in the report, state appropriations for public higher education fell for the fourth straight year in 2010-2011.5 These funding cuts result in higher tuition for students, making college less affordable—particularly for those with low incomes. The cuts also affect the state’s already underfunded need-based financial aid programs. Thus, the number of students who qualified for but did not receive a need-based state grant increased by 32 percent from 2010 to 2011, leaving 90,424 qualified students without such assistance.6

Many of the state’s educational shortcomings highlighted in the report may be linked to a need for additional revenue and investment in higher education. As discussed in a prior KCEP report, if postsecondary education is to become more attainable for Kentuckians resources are needed to prevent unreasonable tuition increases and to increase financial aid support for low-income students.

  1. The report focuses on progress toward 2014 intermediary targets.
  2. The 2014 target is a 7 percentage point difference.
  3. The goal is a 2.1 percent difference.
  4. The 2014 target for associate’s graduation rates is a 3.9 percentage point gap. In 2010-11, the gap was 6.8 percentage points. For bachelor’s degree graduation rates, the 2014 target is an 11 percentage point difference, and the 2010-11 gap was 13.7 percentage points.
  5. The 2012-2014 budget further cut higher education by an additional 6.4 percent.
  6.  Adjusted for inflation, institutional tuition revenues have grown 66 percent since 2004, compared to 15 percent for state financial aid spending.

Commission Whittling Down Tax Proposals

Kentucky Commission Rejects Adding Tax to Food Bought at Groceries

Tax Reform Commission Seeks to Narrow Proposals

Arguments to Cut Income Tax Miss Context and Ignore Tax’s Benefits

Those arguing for a shift toward sales taxes and away from income taxes in Kentucky overstate the influence of income taxes on where people live. And they overlook the benefits of income taxes, including how they improve tax fairness and drive long-term revenue growth.

One argument, which comes up in the consultants’ report to the governor’s tax reform commission, concerns location decisions along Kentucky’s border regions. Since close to half of the Kentucky population lives close to a state border, there are more opportunities for individuals to choose which state to live in. Yet while the research on this question finds that income taxes make a statistically significant difference in location choices when everything else is equal, the effect found is small.1 And everything else is rarely equal, as residents take into account differences in public services, amenities, lifestyle options and commutes in making location decisions.

Part of the reason the effect is small is that income tax rates don’t tell the whole story of how taxes differ between states. Those states with lower income taxes typically have higher property and sales taxes. Also, some states like Indiana, Illinois, Ohio and West Virginia don’t allow itemized deductions on their income taxes, making the difference in actual income taxes paid less than the tax rates would imply. And the federal deductibility of state income taxes has the effect of decreasing the real difference in income taxes between states. Many people get back 25-35 cents of each dollar they pay in state and local income taxes in lower federal income taxes.

Below are two graphs illustrating the big picture of how Kentucky’s taxes compare. The first looks at Kentucky and Indiana. While it’s true that for many income groups Kentucky has higher income taxes (state and local) than Indiana, the difference between the two states shrinks when all state and local taxes are compared.

It’s also clear from the graph that Indiana’s tax system is more regressive than Kentucky’s—Indiana taxes low-income people more and high-income people less. That’s what happens in states with tax systems more heavily weighted toward sales taxes than income taxes.

 Kentuckiana taxes

Source: Institute on Taxation and Economic Policy2

The second chart looks at total state and local taxes by income group for Kentucky and all its surrounding states. As the graph shows, total tax systems in these states are actually very similar. The one real exception for high-income people is Tennessee, which has lower state and local taxes on the upper end because it lacks an income tax on non-investment income (Illinois has raised its income tax since this study was done). However, Tennessee pays for this omission with a very regressive tax system and among the lowest per student public school funding in the country.

 total s&l

Source: Institute on Taxation and Economic Policy3

Focusing on income taxes alone ignores this broader context as well as other research that questions how much income taxes affect where people live. Cuts or increases in state income taxes do not lead to substantial in- or out-migration. One important reason is that few people move between states anyway (only 1.7 percent of US residents move on average annually). Those that move are largely motivated by factors other than taxes, including job opportunities, family considerations, housing costs and the weather. Tax differences between states are small when all taxes are taken into account, as shown above, and are especially small when compared to other differences like housing costs. And high earners are more likely to have many of the characteristics that discourage relocation, including marital and employment status, age, homeownership and community responsibilities.4

Also often overlooked is the important role of individual income taxes, as compared to other taxes, in generating adequate revenue needed for ongoing investment in public services. Income taxes grow faster than other taxes—in the long run, according to one analysis, income taxes can be expected to grow over twice as fast as sales taxes.5 This means “maintaining investments in education and infrastructure is more difficult as sales taxes become more dominant.”6

Kentucky already has a serious problem with long-term revenue growth. Any move away from income taxes would worsen that problem while shifting tax responsibility away from those most able to pay. 

  1. See William Hoyt, et al., “Report to Governor’s Blue Ribbon Commission on Tax Reform by Economic Consultants,” September 19, 2012, http://ltgovernor.ky.gov/taxreform/Documents/20120919/20120920_ConsultantReport.pdf, p. 38.
  2. Share of family income for non-elderly taxpayers; includes impact of federal deduction offset. Institute on Taxation and Economic Policy, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” November 2009, http://www.itepnet.org/whopays.htm.
  3. Institute on Taxation and Economic Policy, “Who Pays?”
  4. Robert Tannenwald, Jon Shure and Nicholas Johnson, “Tax Flight is a Myth: Higher State Taxes Bring More Revenue, Not More Migration,” Center on Budget and Policy Priorities, August 4, 2011, http://www.cbpp.org/cms/index.cfm?fa=view&id=3556.
  5. Donald Bruce, William F. Fox and M. H. Tuttle, “Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics,” Southern Economic Journal, 2006.
  6. Donald Bruce and William Fox, “Revenue Options for Ohio’s Future,” Report Prepared for the Education Tax Policy Institute, May 13, 2011, http://www.etpi-ohio.org/assets/Ohio-Tax-Structure-022211KEMfinallogo2.pdf.

Federal Proposals Would Extend Tax Breaks for a Handful of Wealthy Kentuckians While Ending Support for Many Working Families

New Report from the Center on Budget and Policy Priorities  

Federal Proposals Would Extend Tax Breaks for a Handful of Wealthy Kentuckians

While Ending Support for Many Working Families

Recent proposals from Congressional Republican leaders would extend lucrative tax breaks for 50 multi-million-dollar estates in Kentucky (0.1% of Kentucky’s estates) while letting tax improvements expire for 183,209 moderate-income Kentucky families with 332,944 children, according to a new report from the nonpartisan Center on Budget and Policy Priorities.

The proposals would continue an estate tax cut Congress enacted in 2010 that would benefit a tiny fraction of the wealthiest estates nationwide while expanding budget deficits by $141 billion over ten years. But the proposals would not continue vital tax credit improvements for millions of working families including the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC). Failure to extend these tax credit improvements would push over a million people, including 900,000 children, into poverty nationwide.

“Kentucky’s federal delegation should reject plans that would increase poverty while giving big tax breaks to just 50 of Kentucky’s wealthiest estates,” said Jason Bailey, Director of the Kentucky Center for Economic Policy. “Refundable tax credits improve the lives of over 183,000 Kentucky working families, including many children. They should not be asked to sacrifice more to provide yet another tax break to those with the greatest wealth.”

In 2010, Congress passed a generous, temporary estate tax cut for the wealthiest estates, providing them with a windfall of an additional $1.1 million on average. This significant cut followed nine years of reductions in the estate tax which quadrupled the amount that heirs can receive tax-free.

Proposals from the leadership of the House and Senate would continue this generous exemption, while failing to continue tax credit improvements for working families that Congress extended at the same time it cut the estate tax. Those improvements are scheduled to expire December 31.

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The Center’s full report can be found at: http://www.cbpp.org/cms/index.cfm?fa=view&id=3850.

Medicaid Provides for the Poorest and Sickest

What Would Kentucky Gain from More Business Tax Cuts?

For a state like Kentucky—with high levels of poverty, low wages and too few jobs—a perpetual issue is how government can do more to promote prosperity. For years, the state has focused heavily on reducing business taxes and providing special tax incentives with the hope of attracting industry.

In truth, business tax cuts are not a formula for long-term economic development. Yet a focus on that strategy continues in the recently-released consultants’ report to Governor Beshear’s Blue Ribbon Tax Reform Commission.

The report argues that Kentucky needs to improve its tax competitiveness, and puts forward several large business tax cuts as options. But two critical questions should be asked about this strategy. First, how competitive are Kentucky’s business taxes already compared to other states? And second, how important are taxes compared to other factors that drive economic development, including investments in public services that are funded by tax dollars?

How competitive are Kentucky’s business taxes already?

The first question is answered by the consultants’ research, which in fact shows that Kentucky’s business taxes are already low compared to most nearby states—begging the question of how we would benefit from lowering them further.

The main study of competitiveness cited in the report compares states on how much they tax new private investment. Rather than performing poorly, Kentucky does well by this measure, ranking fourth-best among the 13 states identified by the consultants as competitors.1 In another study cited by the consultants Kentucky also performs very well—ranking fifth out of the 13 states for mature firms and third among those states for new firms.2

The consultants’ report also shows that Kentucky’s corporate income tax rates are lower than almost all of the comparison states, and its tax on limited liability entities (which are like corporations) is so negligible that 82 percent of those businesses pay only the $175 minimum.

The only measure in the report that could possibly be interpreted as an indicator of less competitive business taxes is from a study looking at business taxes as a percentage of private sector gross state product. Kentucky has the 3rd-highest rate among the 13 states. However:

  • The authors of that study say the measure “is not a clear indicator of the competitiveness of a state’s business tax system in terms of attracting new investment” and note that it “does not provide sufficient information to evaluate a state’s competitiveness.”3
  • Kentucky’s rate is only 0.3 percentage points higher than the median of the 13 states—hardly a substantial difference.
  • The authors acknowledge that the measure includes severance taxes, resulting in states like Alaska, Wyoming and North Dakota having the highest effective rates in the country largely because they are well-endowed with natural resources, not because they overtax businesses. Kentucky has a significant severance tax because of its coal resources, while many of the 13 competitor states have no comparable resource.

Despite providing evidence that Kentucky’s business taxes are actually not out of proportion with other states, the consultants’ report presents ways to cut them further. One of the major business tax cut options included is the elimination of personal property taxes. But the report cites research showing that property taxes are a smaller share of business taxes in Kentucky than in the nation. A separate paper shows Kentucky having the 11th lowest business property taxes in the country.4

It should not be surprising that Kentucky’s business taxes are already low. Ever since Toyota came to Kentucky in the late 1980s, the state has regularly expanded a set of very aggressive business tax incentives. Just in recent years, special sessions were called in 2006 and 2009 to cut business taxes and/or expand tax incentives, and new incentives were enacted as recently as the 2012 session for large manufacturers.

How important are taxes anyway?

The answer to the second question—how much do taxes matter?—also calls the consultants’ focus on tax competitiveness into question.

While most of the economic literature suggests a relationship between business taxes and economic development, it is in fact a very modest relationship. That means business tax cuts are an expensive way to create jobs, and are even less beneficial once the negative impact on public services from decreased revenue is taken into account. Taxes play a modest role in part because state and local business taxes are a very small percentage of the cost of doing business, and tax differences between states pale in comparison to other differences.5

What’s more, the consultants did not look at the role of taxes in funding investment in public services needed for economic development, including a skilled and educated workforce, a well-maintained transportation system, a healthy populace, efficient courts, adequate public safety and an overall high quality of life. The relationship between investments like early childhood education and economic growth are well documented.6

Our ability to finance those services decreases to the extent that we cut taxes. And while Kentucky tends to perform well in rankings of business taxes, the state does not rank well in our levels of education or the health of our population, and many vital state services have been cut or underfunded in recent years.

While cutting business taxes allows political leaders to seem like they are doing something to create jobs, doing so is expensive and erodes our ability as a state to invest in the fundamentals needed for economic development. It’s time to put greater emphasis on the investments in education, health and quality of life that are essential for prosperity—and that require taxes.

  1. It should be noted that this study does not include tax incentives in the analysis, which Kentucky uses extensively. It also overstates the interstate differential in tax rates by not taking into account that the deductibility of all these taxes on federal corporate tax returns substantially mitigates the differences. Robert Cline, Andrew Phillips and Thomas Neubig, “Competitiveness of State and Local Business Taxes on New Investment,” Ernst & Young and Council on State Taxation, April 2011, http://www.cost.org/WorkArea/DownloadAsset.aspx?id=78442.
  2. Kentucky also ranks 18th best among all states for mature firms and 7th best for new firms in this study. Tax Foundation and KPMG, “Location Matters: A Comparative Analysis of State Tax Costs on Business,” 2012, http://taxfoundation.org/sites/taxfoundation.org/files/docs/location%2520matters.pdf.
  3. Andrew Phillips, Robert Cline, Thomas Neubig and Hon Ming Quek, “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2011,” Ernest and Young/ Council on State Taxation, July 2012, http://www.cost.org/Page.aspx?id=69654.
  4. Jooni Kim, Andrew Phillips and Robert Cline, “Property Taxes on Business Capital: A Large and Growing Share of State and Local Business Taxes,” State Tax Notes, March 27, 2006.
  5. Peter S. Fisher, “Corporate Taxes and State Economic Growth,” Iowa Fiscal Partnership, February 2012, http://www.iowafiscal.org/2011docs/110209-IFP-corptaxes.pdf. Michael Mazerov, “Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs,” Center on Budget and Policy Priorities, September 14, 2010, http://www.cbpp.org/files/9-14-10sfp.pdf.
  6. See research on early childhood education by economist Timothy Bartik: http://www.upjohn.org/Research/SpecialTopics/EarlyChildhoodProgramsandEconomicDevelopment. Research on the value of public services is summarized in Robert G. Lynch, “Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development,” Economic Policy Institute, 2004, http://www.epi.org/page/-/old/books/rethinking_growth_(full).pdf; Jeffrey Thompson, “Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives,” Political Economy Research Institute, August 2010, http://www.peri.umass.edu/fileadmin/pdf/published_study/priorities_August9_PERI.pdf.

The Bigger Picture on Who Pays Taxes

The vast majority of Kentuckians (and Americans) who don’t owe federal income taxes are either workers who pay payroll taxes, seniors, people with disabilities or students.

In 2009-2010, 49 percent of Kentuckians owed no federal income taxes. 76 percent were either workers who paid federal payroll taxes (57 percent) or the elderly (19 percent)—many of whom paid federal income taxes before they retired. These groups didn’t owe federal income taxes because their wages were too low; because they qualified for measures like the Earned Income Tax Credit, which helps lift millions of American families out of poverty; and/or because Social Security is only partially taxed.

Many of the remaining Kentuckians who owed no federal income tax either have an illness or disability (15 percent) or were students (3 percent)—and many students will pay federal income tax once they enter the workforce. A significant portion of the remaining group consisted of early retirees and those who couldn’t find work given the high unemployment rates of the past few years.

What’s more, the individual income tax is only one of many taxes that Americans pay. State and local taxes are regressive—meaning that lower income people pay more of their incomes in these taxes than high-income people. In Kentucky, lower and middle-income people pay between 9 and 11 percent of their incomes in state and local taxes, while the richest Kentuckians pay only between 6 and 8 percent.

who pays 

Source: Center on Budget and Policy Priorities unpublished analysis of 2009 and 2010 Current Population Survey data.

Taxing Groceries Not a Good Strategy for Kentucky

The recently released consultants’ report to the governor’s tax reform commission included the option of applying Kentucky’s sales tax to food for home consumption (i.e., groceries). While broadening the tax base is an important strategy to raise and sustain revenue, a tax on groceries would make Kentucky’s tax system less equitable. And because groceries are a shrinking portion of what people consume, it could worsen Kentucky’s long-term revenue problems.

Kentucky applied the sales tax to groceries until 1972 when it exempted them for tax fairness reasons. As a share of income, food taxes are typically four to five times higher for poorer families than for upper-income families—making it even more regressive than the already regressive sales tax.1 And unlike many other products and services that are subject to the state sales tax, a family cannot simply abstain from food purchases.

The consultants suggested that the impact of a groceries tax on low-income people could be offset through some kind of tax credit. But the reality from the experience in other states is that such credits don’t reach all of the people who are impacted, are often inadequate to offset the cost of the groceries tax, typically are not adjusted with inflation and are vulnerable to elimination in tough budget times.2

Taxing groceries is also not a good strategy for raising much-needed revenue. Groceries are a declining share of U.S. consumption, which is shifting toward services. Food and nonalcoholic beverages for consumption at home have dropped from 14 percent of personal consumption expenditures in 1969 to 7 percent in 2011 (see absolute values in graph below). Meanwhile, services increased from 50 percent to 66 percent of consumption over that time period.

A tax on groceries would therefore be a slow-growing source of revenue—and could actually reduce the rate of state revenue growth. Studies have shown that having food in the sales tax base makes sales tax revenue grow more slowly than not having it.3 Yet slow revenue growth is the exact problem tax reform is supposed to address, since at current rates of growth the state faces a revenue shortfall of at least $1 billion by the end of the decade.

There are fairer and more effective ways to generate the additional state revenue Kentucky needs to prosper.

consumption

Source: Bureau of Economic Analysis

  1. Nicholas Johnson and Iris J. Lav, “Should States Tax Food?: Examining the Policy Issues and Options,” Center on Budget and Policy Priorities, April 1998, http://www.cbpp.org/files/stfdtax98.pdf.
  2. Johnson and Lav, “Should States Tax Food?”
  3. Johnson and Lav, “Should States Tax Food?”