Federal Limit on Tax Expenditures Would Generate Needed Revenue and Make Taxes Fairer

President Obama’s proposal to limit tax savings on itemized deductions and exclusions for high-income people would raise more than half a trillion dollars over the next decade while increasing taxes for only 1.9 percent of Kentuckians, according to a new report released today by Citizens for Tax Justice (CTJ).

The tax expenditures President Obama proposes to limit give the biggest tax breaks to the wealthiest individuals. For example, 77 percent of the benefit of the mortgage interest deduction goes to homeowners with incomes above $100,000.

That’s because for each dollar that high-income taxpayers in the 33, 35, and 39.6 percent federal income tax brackets deduct from their taxes, they save 33, 35, or 39.6 cents, respectively. Middle-income people are in lower tax brackets, and thus save only 15 or 28 cents for each dollar of deductions. Also, many low- and middle-income people take the standard deduction, and so don’t benefit at all from the ability to claim deductions.

The proposed legislation would limit savings to 28 cents per dollar on some deductions and exclusions. The average tax increase of those affected by the proposal would be less than one percent of their income.

Nationwide, 3.6 percent of taxpayers would see their taxes go up. As a relatively poor state, even fewer Kentuckians are affected. In Kentucky and three other states, just 1.9 percent of taxpayers would pay more. The only states with a smaller portion of tax filers whose federal marginal tax rates surpass the 28 percent limit are Arkansas and West Virginia (1.6 percent), and Idaho and Mississippi (1.7 percent), while the District of Columbia has the highest portion (8.9 percent).

As CTJ outlines in the report, two thirds of the plan’s overall savings come from limiting three particular deductions: state and local taxes (36 percent), charitable donations and mortgage interest (15 percent each).

Some charities have voiced concern that limiting charitable deductions would significantly decrease donations, but research indicates that the effect would be quite modest. To begin with, Obama’s proposed limit preserves a large marginal incentive to give – in other words, taxpayers save 28 cents on each additional dollar they give. And insofar as donors are motivated to give by factors in addition to tax incentives such as altruism, religious belief and social ties, they will continue to give robustly.

Tax breaks drain revenue from investments in schools, health care and infrastructure. In all, the federal government spends $1.1 trillion a year on tax expenditures—more than it spends on Social Security or on Medicare and Medicaid combined. Limiting deductions can help the country better pay for the services it needs by asking more of those Americans who can afford it the most.

Expanding Medicaid in Kentucky Could Improve the Health of Women and Babies

In Kentucky, nearly 41 percent of low-income women aged 19 to 44 are uninsured. However, if the state expands Medicaid through the Affordable Care Act (ACA), these women could gain coverage and improve their health and the health of their babies.

Currently Medicaid coverage for adults in Kentucky is very limited and leads to gaps in coverage for women.1 Many low-income women are eligible only while they are pregnant and for 60 days after they give birth.2

If Kentucky decides to expand Medicaid through the ACA in 2014, low-income women with incomes up to 138 percent of the federal poverty level would qualify for coverage. As shown in the chart below, that is nearly 95,000 uninsured women.

 coverage status low-income women

Source: Center on Budget and Policy Priorities analysis of 2011 American Community Survey.

Gaining health coverage could improve the health of these women and their babies. As noted in a recent fact sheet released by the Center on Budget and Policy Priorities, research shows that when women have health coverage before becoming pregnant and between pregnancies, they are healthier during pregnancy—and their babies are more likely to be healthy at birth. According to the fact sheet, health coverage before pregnancy enables women to receive preventive care, participate in tobacco cessation programs and access substance abuse treatment and other services. And health coverage in between pregnancies provides women with access to care that can improve the outcomes of subsequent pregnancies—including treatment for diabetes and hypertension and clinical interventions to address family violence, depression and stress.3

Expanding Medicaid to include more low-income women could also end up reducing Medicaid costs. The state already covers the costs of delivery for many of these women; Medicaid pays for approximately 44 percent of births in Kentucky.4 Providing continuous Medicaid coverage—before and after pregnancy as well as during—could increase women’s access to family planning services and reduce state administrative costs associated with processing enrollment and disenrollment for women who have Medicaid coverage only when they are pregnant.5

 

 

  1. Currently in Kentucky, the only adults eligible for Medicaid are those with disabilities, pregnant women, seniors and adult parents/relative caregivers of children. Parents/relative caregivers must have extremely low incomes—no greater than 62 percent of the federal poverty line ($14,291 for a family of four); if the parent/caregiver is not working, his/her income can be no greater than 36 percent of the federal poverty line. There are also additional criteria to qualify—it must be a single-parent household or have one of the parents unemployed, underemployed, or disabled. “Medicaid and CHIP Eligibility by State,” http://www.ncsl.org/issues-research/health/medicaid-eligibility-table-by-state-state-activit.aspx.
  2.  In order to receive Medicaid in Kentucky during pregnancy, a woman’s family income can be up to 185 percent of poverty; she is then eligible for these benefits until 60 days after the birth of her child.
  3. Center on Budget and Policy Priorities, “Expanding Medicaid Will Benefit Both Low-Income Women and Their Babies,” April 17, 2013, www.cbpp.org/files/Fact-Sheet-Impact-on-Women.pdf.
  4. Kaiser Family Foundation, “Kentucky: Births Financed by Medicaid,” http://www.statehealthfacts.org/profileind.jsp?cat=4&sub=57&rgn=19. Medicaid also covers the care for women’s babies if they are born prematurely or have health problems.
  5. Center on Budget and Policy Priorities, “Expanding Medicaid Will Benefit Both Low-Income Women and Their Babies.”

Presentation: The Coal Severance Tax in Appalachian Kentucky

Diversifying the economy of Appalachian Kentucky will require financial resources to pay for needed new investments. The coal severance tax is one of the largest pools of economic development resources in the region. But what role has the severance tax played in helping the region’s economy transition, and what role can it play in the future?

Coal Severance Presentation

Text of Coal Severance Presentation

 

Far Less Mining: Region Experiencing Rapid Drop in Coal Severance Tax Funds

Interactive Map: Expanding Medicaid Would Increase Health Coverage In Every Kentucky County

The Governor will be deciding soon whether or not to expand Medicaid eligibility in Kentucky through the Affordable Care Act. If the state does move forward with the expansion, nearly 280,000 uninsured Kentucky adults could receive health coverage. These uninsured Kentuckians who stand to benefit live across the state; in many counties, approximately half of the uninsured would qualify for coverage.

We have previously noted that among the uninsured in Kentucky who would qualify for coverage are workers—including thousands of store clerks, cooks, waiters and waitresses, construction workers, child care workers, hair stylists and nursing home caregivers—and veterans and their spouses. Another important fact about Medicaid expansion in Kentucky is that it would benefit workers across the state—providing coverage for 34 to 63 percent of uninsured Kentucky adults, depending on the county.

The interactive map below shows the approximate percentage of uninsured in each of the state’s counties that would qualify for coverage under Medicaid expansion. For instance, in Owsley County, 63 percent of uninsured adults—approximately 422 people—would qualify for coverage. In Fayette County, 49 percent of the county’s uninsured adults—or nearly 21,000 people—would qualify.

 

Note: The map was changed from its original version, to focus on Kentucky adults age 18-64.

Sharp Decline in Coal Severance Tax Revenue Underscores Need for Economic Plan

New data showing that eastern Kentucky lost 4,000 coal jobs last year should raise alarm among public officials about the longstanding need for an economic transition plan. So should the big drop in eastern Kentucky coal severance tax receipts, which are 33 percent lower over the last 12 months than the previous year.

Coal Severance Revenue Brief

What Are Taxes For?

Tax Day is an important time for Kentuckians to consider the role of government in our state and nation. Taxes are a critical tool for doing things together that we cannot do alone. They support investment in education, health care, infrastructure, social services and other public structures essential for the common good in Kentucky.

These days, taxes are the subject of great controversy. The April income tax due date is a time when those seeking to shrink or eliminate many of the functions of government argue for more cuts. But tax dollars pay for investments on which we can agree: advancing economic development; contributing to improved health and safety; creating educated workers and citizens; stewarding our natural and other resources; and fostering community. When our public systems and structures are starved of resources, our quality of life is threatened. When they are adequately supported and effectively implemented, they make a better Kentucky possible.

Yet the recession and current slow recovery mean meager levels of revenue to pay for needed investments. Because we face a structural imbalance in our revenue system in Kentucky and have not enacted comprehensive and sufficient tax reforms, we will fail to generate adequate revenues even once the economy fully recovers.

Meanwhile, the current political debate largely ignores that tax dollars support essential public services. A real public conversation about the appropriate level of taxes must start with where those tax dollars go.

In 2013, state taxes support a wide variety of important functions, including the following:

Education: Early childhood education and child care; K-12 education; higher education; adult education; worker training; vocational education; libraries; public television.

Health Care: Health insurance for people with disabilities, pregnant women, low-income children and parents, and the elderly in nursing homes through Medicaid; public health; mental health services; disability services; substance abuse services.

Human Services & Supports: Child and domestic violence protection; foster care and adoption; housing; nutrition assistance; support for low-income families; support for veterans; support for the elderly.

Infrastructure: Roads; water and sewer systems; public transit.

Environmental Protection: Land conservation; enforcement of laws protecting land, air and water; state parks; forest protection and management.

Public Safety & Justice: Court system; public defenders and prosecutors; state police; jails and prisons; disaster relief; consumer and worker safety protection.

Economic & Community Development: Small business development; tourism; job development; agricultural development; arts and culture.

Kentucky is projected to collect about $9.5 billion in its General Fund in 2014. Thirty-nine percent of the General Fund is expected to come from the individual income tax; 33 percent from the sales tax; six percent from the property tax; four percent from corporate taxes and the remaining from the coal severance tax, cigarette tax, lottery and other sources.1

Those dollars are allocated according to the following pie graph.

 spendingpie2014

Source: Budget of the Commonwealth 2012-2014, HB 265 2012

To see where federal tax dollars go, click here.

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). For more information, please visit KCEP’s website at www.kypolicy.org.

  1. Office of the State Budget Director, “2012-2014 Executive Budget,” Budget in Brief, http://www.osbd.ky.gov/NR/rdonlyres/1ADF4A09-F159-40BE-9DD0-2156ACCD0276/0/1214BOCBudInBrief.pdf

Appalachia’s Bright Future Conference April 19-21

“Appalachia’s Bright Future Conference April 19-21”

By Nola Sizemore

Without More Revenue, Paying Pension Liabilities Will Continue to Be Challenge

After the General Assembly passed final pension legislation, some proponents of Senate Bill 2 hailed it as “historic.” But the costs Kentucky faces to pay down its unfunded pension liability remain substantial—and the new revenues generated by the General Assembly to make those payments are meager.

After Senate Bill 2 is implemented, the employers that participate in the Kentucky Employees Retirement System (KERS) will need to come up with an estimated $590 million in pension payments in 2015 and $621 million in 2016, an increase of $253 million and $284 million from the 2014 level, respectively.1 As we’ve outlined previously, the revenue bill is expected to generate only $31.7 million in annual net new state dollars.

The biggest employers in KERS are the Department of Community Based Services, which provides a variety of human services through social workers and case managers, the Department of Highways, the Department of Corrections, the court system and the state police. Collectively, those agencies employ 29 percent of those covered under KERS.

The remaining employers are wide variety of state agencies—from tourism to energy to insurance regulation—and other entities many of which depend heavily on state dollars, including the regional universities and community college system, various social services organizations, health departments and regional mental health centers.

All throughout the debate over pension legislation in the General Assembly, officials said that the state needed around $100 to $120 million in additional monies each year to make the full annual General Fund pension payment. The final revenue bill generated only $65.7 million in additional General Fund dollars. And using the General Fund figure alone ignores an important fact—the General Fund pays just a portion of the personnel costs of the KERS-covered agencies and entities that provide state services. Those that rely more heavily on other revenue sources will need to find additional dollars to make the payment.

For example, the Department of Highways is the second-largest KERS employer, as mentioned above, and has nearly $300 million in annual personnel costs but receives no General Fund money. Instead, it relies substantially on the Road Fund which was cut by $34 million in the pension revenue bill. The recent bankruptcy filing of mental health provider Seven County Services suggests how difficult it is for many agencies to make up the liability without more state support—especially given how much their core state funding has been cut.

As the table below indicates, the costs associated with paying the liability are quite large and are projected to grow about 4 percent per year after 2016. And these numbers are lower than they should be if the state was being fiscally responsible, because one measure in Senate Bill 2 extended the time period the state will use to pay off the liability—which is akin to spreading out your mortgage or student loan debt over a greater number of years. While that lowers annual payments, it also increases total long-term costs.

Even before pensions are considered, revenues for the next budget will be far short of what Kentucky needs to roll back painful budget cuts and make the needed investments in schools, health, human services and other areas. The only way revenues will be adequate is through a real tax reform plan that allows the state to meet its promises to workers and its responsibility to the Commonwealth’s future.

pension contributions

 

  1. Source is KCEP analysis of the actuarial analysis of Senate Bill 2 produced by Cavanaugh MacDonald.

Child Care Cuts Part of Broader Underinvestment in Early Learning

Recent cuts to Kentucky’s Child Care Assistance Program (CCAP) and Kinship Care are part of a broader set of cuts to child care and early childhood education programs, despite solid evidence that we actually need more investment in these areas.

In January, the Cabinet for Health and Family Services announced a moratorium beginning this month on new enrollments in CCAP, a program that subsidizes quality child care for income eligible families where parents are working, participating in an educational or training program, or receiving aid through the Temporary Assistance to Needy Families Program (TANF).

Without CCAP, many parents may be forced to settle for lower quality care or quit their jobs. The cuts will also threaten the viability of many local child care centers, as described in an important new report from Kentucky Youth Advocates. Even before these cuts, many child care centers struggled.

According to 2012 KIDS COUNT data, average annual enrollment in CCAP hovered around 75,000 from 2008 to 2012, indicating that a roughly equal number of children enter the program each year as leave, presumably when they graduate onto pre-school or Kindergarten. Under the application freeze, new vacancies will not be filled and the program will shrink over time.

In addition, beginning in July, CCAP income eligibility will decrease from 150 to 100 percent of the federal poverty line, removing child care subsidies from about 14,000 children and giving Kentucky the lowest eligibility threshold in the country. The Governor’s Office of Early Childhood’s 2013 Profile reports that 29.5 percent of Kentucky’s children live under 100 percent of the poverty line, while 41.6 percent live under 150 percent.

Kinship Care, also subject to a moratorium on new enrollments, provides a $300 monthly stipend to relatives caring for abused or orphaned children. If enrollment were allowed to increase in 2013 by the same 7 percent it has on average since 2008, the program would serve about 800 more children this year. But these kids and their care givers—who must meet TANF eligibility requirements and are therefore in need—will not receive assistance.

Funding for CCAP and Kinship Care comes from state dollars and in large part from the federal government through the Child Care and Development Block Grant (CCDBG) and TANF. For a few years during the recession, federal funding for child care got a boost from federal stimulus dollars through the American Recovery and Investment Act of 2009. But ARRA has expired, and in 2012 federal child care funding from CCDBG and TANF will be 22 percent below its inflation-adjusted 2001 levels.

More federal budget cuts to early childhood programs are likely coming due to caps on future federal spending enacted in 2011 and the impact of sequestration should it remain in place. Granted, the Continuing Resolution (CR) took a little of the edge off the sequester: CCDBG will be cut by three rather than sequestration’s full five percent and TANF funding will stay at its FY 2012 level. Head Start, another important early childhood development program, will be cut by five percent minus a negligible $33 million boost.

But the small cushion the CR provides against the full force of sequestration is cold comfort given the combined impact of funding cuts at the federal and state levels. Prior to the recession, state funding for child care had received about a $10 million boost from Tobacco Settlement monies starting in 2001 and was relatively flat until 2008. Between 2008 and 2012, Kentucky General Fund and Tobacco Settlement funding for child care dropped 45 percent in inflation-adjusted dollars, and by 58 percent in terms of the General Fund alone. Especially in difficult economic times when children in low-income households are even more vulnerable, early childhood development programs need expansion.

In his most recent State of the Union Address, President Obama proposed public pre-school for all four-year-olds from low- and moderate-income families, much like Governor Beshear’s 2012 Preschool Expansion Proposal which set the goal of providing preschool for children living below 200 percent of the poverty line. These proposals reflect the widespread understanding that early childhood education is a critical component of kids’ success and an excellent investment in the economy.

But given that 53 percent of Kentucky’s kids live below 200 percent of the poverty line and that the state does not even provide funding for full-day, state-wide kindergarten, Kentucky has a long way to go towards a fully-funded, high quality system of early learning and care.

And while early childhood and child care programs get cut, in Washington the House has passed a budget with big tax cuts for high-income households and corporations and deep cuts to discretionary spending programs like child care and Head Start. Meanwhile, the state continues to ignore the need for more revenue through comprehensive tax reform but enacts a tax credit for buying a new car.

Our nation and our state must get priorities straight and generate the revenues needed to care for and invest in children.