By Kevin Wheatley
Wealthiest Kentuckians Pay Far Less in State and Local Taxes than Low- and Middle-Income Kentuckians
Wealthiest Kentuckians Pay Far Less in State and Local Taxes than Low- and Middle-Income Kentuckians
Comprehensive New 50-State Study Provides Detailed Profiles and Comparisons of Tax Systems
While the poorest 20 percent of Kentuckians pay 9.1 percent of their income in state and local taxes and the middle 20 percent pay 10.9 percent, the wealthiest one percent pay only 5.7 percent, according to the fourth edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” released today by the Washington-based Institute on Taxation and Economic Policy (ITEP).
“Our tax system is upside down,” said Jason Bailey, director of the Kentucky Center for Economic Policy. “It’s the wealthiest Kentuckians who have the greatest ability to pay taxes and whose incomes have grown the most over the past couple of decades. Many poor and middle-class Kentuckians have seen their wages stagnate or decline. Yet the wealthiest pay far less of their income in taxes.”
The tax reform recommendations issued by the Governor’s Blue Ribbon Commission include some measures that would make Kentucky’s tax system less regressive, including a limit on itemized deductions for high-income people, a phase-out of the retirement income exclusion for wealthier retirees and an Earned Income Tax Credit for working poor families. Those ideas should move forward along with other ways to make Kentucky’s tax system fairer while generating the revenues the state needs—including the creation of an additional, higher income tax bracket for wealthier people and the re-establishment of the Kentucky estate tax.
In the debate over tax reform in Kentucky, some have argued that Kentucky should reduce or eliminate its income tax and move toward a consumption-based tax system like Tennessee, Indiana or Florida. But the ITEP report shows that those three states are among the “Terrible Ten” most regressive tax systems in the country. In the Terrible Ten, middle-income families pay up to three times as high a share of their income as the wealthiest families while low-income families pay up to six times as much.
That’s because the sales tax is highly regressive (taking a bigger share of poor people’s income than the wealthy) while the income tax is progressive. In Kentucky, sales taxes take up 5.6 percent of income for the poorest 20 percent of Kentuckians but only 0.8 percent of the richest one percent. “Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so,” said Matthew Gardner, Executive Director of ITEP and an author of the study.
The fourth edition of Who Pays? measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia. The report is available online at www.whopays.org.
The Kentucky Center for Economic Policy is a non-profit, non-partisan initiative that conducts research, analysis and education on important policy issues facing the Commonwealth. Launched in 2011, the Center is a project of the Mountain Association for Community Economic Development (MACED).
The Institute on Taxation and Economic Policy (ITEP) is a 501 (c) (3) non-profit, non-partisan research organization that works on federal, state, and local tax policy issues. ITEP’s mission is to ensure that elected officials, the media, and the general public have access to accurate, timely, and straightforward information that allows them to understand the effects of current and proposed tax policies. www.itep.org.
By Kenny Colston
Report Release: “2013 Is a Good Year to Repair (if Not Replenish) State Rainy Day Funds“
Kentucky Falls Short on Preparing for Future Recessions
Rainy day fund fix would protect state, improve financial stability
Kentucky should fix a flaw in the design of its rainy day fund that hindered the state’s ability to weather the last recession and leaves it vulnerable to future downturns, according to a report released today by the Center on Budget and Policy Priorities, a non-partisan policy research organization based in Washington, D.C.
Kentucky’s rainy day fund, the budget reserve that the state can tap when a recession causes a sudden drop in revenue, is generally capped at a level far too low for the state to properly prepare for economic downturns.
“Now is not the time to put more money into the rainy day fund because of the still-weak economy and serious budget needs,” said Jason Bailey, Director of the Kentucky Center for Economic Policy. “But the state can act to lift the cap on our rainy day fund so we don’t find ourselves in the same bad situation when the next recession rolls around.”
As the report indicates, the mechanism by which Kentucky puts money in its rainy day fund using year-end surpluses limits the size of the fund to 5 percent of the state’s General Fund receipts. A cap of around 15 percent would be more appropriate. At the start of the recent recession, the state’s fund only had about 2.5 percent of General Fund receipts.
Across the country, states with strong rainy day funds were able to avert billions in cuts to services like education and health care during the last two recessions, while states with weaker rainy day funds faced greater turmoil as they scrambled to balance their budgets.
With a higher cap, Kentucky could have built a larger rainy day fund and reduced the size of the huge cuts to higher education, public health, public safety and other services in recent years.
“As they recover from the recession replenishing rainy day funds cannot yet be a priority for states. But, now is the ideal time to fix their design flaws,” said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities and author of the report released today.
The Center’s full report can be found at: http://www.cbpp.org/cms/index.cfm?fa=view&id=3887
Others have rightly jumped on Nicholas Kristof’s December column in the New York Times criticizing the Supplemental Security Income (SSI) program for children with disabilities. Kristof uses stories of families in Breathitt County, Kentucky, to suggest widespread abuse of the program, including cases where parents have kept their children from learning to read in order to maintain a monthly check.
Accusations of systematic abuse of SSI for children have arisen before, and the Government Accountability Office and other investigators have examined and discredited the claim. Getting SSI is in fact difficult, child participation in the program is not mushrooming and 98.6 percent of kids under age 12 in SSI are enrolled in school. SSI is a big help to families paying the extra costs associated with raising a child with disabilities, and a growing body of research shows that poor kids in families receiving an income boost tend to do better in school and work and to have higher earnings as adults.
That’s not to say there are no specific instances of misuse or ways to improve the program. But even in Breathitt County, the Social Security Administration reports there were only 262 children on SSI in 2011 in a county with a 47 percent child poverty rate. The share of kids on SSI is substantially higher there than in the nation as a whole, but disbursements are hardly at a level that can be described, in Kristof’s words, as a “burden on taxpayers.”
More importantly, what would cutting this safety net program, as Kristof proposes, truly do to help address the bigger challenge of poverty in Breathitt County and Eastern Kentucky?
The problem with poverty diagnoses like Kristof’s is that they look narrowly at strategies to treat the poor themselves while ignoring the larger historical and economic context in which those families live. He doesn’t dig deeper to ask why there are so many hardships and so few jobs in a place like Eastern Kentucky.
Part of the answer to that difficult question, I believe, can be found in a recent book by economist Daron Acemoglu and political scientist James Robinson titled Why Nations Fail. The authors look across countries and throughout history to ask why some places are poor and some are rich. They conclude that economic success is not the result of culture, geography or other standard explanations. Rather, prosperity is caused by a country’s human-made institutions.
They characterize nations’ economic and political institutions as either inclusive or extractive. Inclusive institutions create a fair environment for competition, provide education and encourage innovation, distribute political power widely and encourage public participation, and have an accountable and responsive government. Extractive institutions are designed to benefit the few at the expense of the many. They discourage democratic participation, fail to enforce the rule of law or promote new economic activity, and are characterized by corruption and cronyism.
Whether a country has inclusive or extractive institutions is established historically, but no place is doomed. Small institutional changes interact with what the authors call critical junctures to set or change a country’s path. Inclusive economic and political institutions create virtuous circles whereby growing prosperity and a strengthening democracy reinforce each other. Extractive institutions create vicious circles that make it harder for things to change.
It’s easy to see how Acemoglu and Robinson’s theories could be applied to Breathitt County and to Eastern Kentucky more generally. The region has long been made up of haves and have-nots. In the late 19th century, wealthy investors and their powerful local allies bought up much of the region’s land and mineral rights. Coal and timber companies extracted the natural wealth while leaving behind little but damaged land. Company towns formed rather than vibrant local democracies. Small groups of local elites, closely linked to dominant industries, established “little kingdoms” in local government focused on enriching themselves and maintaining power.
Although Breathitt County is not now one of the region’s major coal producers, it has been part of eastern Kentucky’s coalfields throughout its history. Coal exemplifies the kinds of challenges Acemoglu and Robinson identify. Its dominance in the region politically, economically and physically has limited economic diversification. The rule of law and protection of private property, two attributes of inclusive institutions according to Why Nations Fail, often haven’t applied to coal. Laws to address the impacts of coal on land, water and worker safety have often been missing or simply unenforced. Just one example: In 2009 flooding along Quicksand and Cane Creeks, exacerbated by poor reclamation of surface mines in the area, destroyed hundreds of homes – in Breathitt County.
While in his column Kristof rightly talks about the importance of schools and of early childhood education in addressing poverty, he fails to mention that Breathitt County’s school system was recently taken over by the state due to corruption and mismanagement at the top. The superintendent was indicted for vote-buying; he is the eleventh county leader (including the sheriff) to have been recently convicted or pled guilty to illegal activity associated with political battles among county elites. The Lexington Herald-Leader noted that Breathitt County “is becoming almost a full-time job for the FBI and the U.S. Attorney.”
When we scratch our heads about poverty in America, we too often ask what’s wrong with poor people who are struggling to survive rather than what’s wrong with our politics and economy. Unfortunately, the conclusion to Why Nations Fail offers no simple solution for poor places. The authors emphasize that the solution is not micro-level changes to incentives or development efforts that just reinforce existing inequalities. The answer, they say, is broad-based empowerment — building a stronger and deeper democracy in those places.
Developing new leaders and organizations can foster inclusive political and economic institutions. That’s not easy. The process is slow, but it can be accelerated by unanticipated critical junctures that create opportunity. Is the current economic transition related to coal in Eastern Kentucky just such an opportunity? It’s hard to say. But building an economy by building a democracy may be just the approach our region needs.
Jason Bailey is research and policy director at the Mountain Association for Community Economic Development (MACED) and director of the Kentucky Center for Economic Policy (KCEP).
As Kentucky legislators consider changes that could cut pension benefits for nurses, social workers, police officers and other public sector workers, they should keep in mind four important facts.