A Tax Shift Is Not Tax Reform

A key question in Frankfort is whether state leaders will enact tax reform between now and the end of the 2014 legislative session.

But a challenge is the question posed by Senate budget chair Bob Leeper in a recent Louisville Courier-Journal article: “What do you mean by tax reform?”

Indeed. Tax reform is not an absolute good. Whether it helps or harms Kentucky depends on the purpose of the reform and the specifics of the proposal.

The recommendations of the governor’s tax reform commission, on which I served, were the result of 10 months of work including public hearings across the state and substantial commission debate. Our recommendations followed a set of principles and were intended as a package to be considered as a whole, not a menu to choose from.

However, recent comments suggest that political leaders may treat the remaining recommendations (a handful passed this session in the pension funding bill) only as a starting point for the conversation.

If that ends up happening, it begs the question of what assumptions, criteria and goals they will use to design a tax reform plan. Here are three principles that are critical:

Tax reform should not shift responsibility away from those most able to pay.
A plan that moves the system away from the individual income tax is nothing more than a shift in tax responsibility from the wealthy over to middle- and low-income Kentuckians. Such a shift would further widen income inequality and increase long-term budget problems by cutting our most productive revenue source, the income tax. Kentucky’s tax system already asks less of those most able to pay. We should be improving tax fairness, not making it worse.

Tax reform should raise revenue to help address our budget needs.
We’ve been through revenue-neutral tax reform—meaning no net new money—in Kentucky before, and it’s one of the reasons we’re still talking about the issue. Only tax reform that raises revenue can begin to address the $1.6 billion that has been cut from the budget and make progress on Kentucky’s many deficits in education, health and other areas. No credence should be given to the fantasy that cutting taxes would increase revenues by attracting massive migration of businesses and individuals to Kentucky.

Tax reform should recognize that economic strength depends first on a strong foundation.
Economic competitiveness often comes up in tax debates, but too often the focus is narrowly on the level of business taxes. In fact, cutting corporate taxes is a weak tool for promoting economic development, and can harm a state’s economy because it means fewer dollars to invest in worker skills and quality of life improvements. What’s more, Kentucky’s business taxes are already low compared to other states. Kentucky’s weaknesses in education and other areas that require public investments are the key barrier to our prosperity.

The purpose of negotiations between the governor and legislative leaders shouldn’t be to pass tax reform for tax reform’s sake. It should be to enact reform that moves Kentucky forward by making the system fairer and helping Kentucky afford crucial public investments. Without clarity about what is guiding reform, it’s possible to do more harm than good.

Proposed Cuts to Medicare and Social Security Would Drive More Seniors into Financial Hardship

Nearly half of elderly Kentuckians are economically insecure—meaning they either live in or are at risk of falling into poverty—according to a new study from the Economic Policy Institute (EPI). Yet instead of safeguarding programs that help seniors meet their basic needs, proposals to cut Medicare and Social Security threaten to push even more seniors into economic vulnerability.

To measure elder vulnerability, EPI uses 200 percent of the U.S. Census Bureau’s Supplemental Poverty Measure (SPM). The SPM improves on the flawed Federal Poverty Line by accounting for out-of-pocket health care costs which are typically high for elderly households, as well as resources seniors have available through government transfer programs. Even the supplemental measure doesn’t fully account for how much it really costs seniors to live, which is measured more accurately by Wider Opportunity for Women’s Elder Index. That index is not yet available for every state. But EPI finds that 200 percent of the SPM approximates the elder index, and so uses it as a proxy for elderly economic vulnerability.

The report shows that 48 percent of elderly Kentuckians fall below 200 percent of the SPM. For those falling between 100 and 200 percent, households may still struggle to meet basic needs and an illness, accident or some other economic shock could push them into poverty.

As EPI explains, House Budget Committee Chair Paul Ryan’s plan to limit Medicare costs by shifting to a voucher system could drive 3.5 million more elderly Americans into economic insecurity by 2022. Because the voucher’s value will be set at a rate that is likely to fall behind growth in health care costs, out-of-pocket spending will go up and seniors may seek less care. With less income and more health needs than working-age adults, the elderly already spend a larger portion of their income on medical costs.

Under President Obama’s proposal to tie Social Security cost-of-living adjustments to a more modest “chained” CPI than the one currently used, elderly Americans would see their Social Security benefits diminish in proportion to the cost of living over time. EPI estimates that the change could push 132,000 seniors into economic vulnerability. That’s a smaller impact than turning Medicare into a voucher, in part because the proposal includes protections for low-income and older beneficiaries.

But both proposals assume that immediate benefit cuts to Medicare and Social Security are needed even while forecasts show that Medicare’s financial condition is improving while Social Security has enough money to pay full benefits until 2033 and about 75 percent of benefits after that. Neither program is at risk of bankruptcy, as is often falsely claimed.

Meanwhile, Kentucky has the 17th largest percentage of economically vulnerable elderly compared to other states, and a recent report from the United Health Foundation ranks Kentucky 5th from the bottom among states in terms of senior health. State budget cuts in recent years have included programs serving seniors like Meals on Wheels, and sequestration’s looming affect on senior aid programs are adding to the challenges facing Kentucky seniors.

The precarious economic condition of many seniors should be taken into account before further cutting the supports we all count on in old age.

Need for Health Care Workers Is an Economic Opportunity

Because the expansion of Medicaid and creation of a state health insurance exchange will provide health coverage to several hundred thousand people, Kentucky will have workforce needs associated with meeting the new demand for care. While that’s a short-term challenge, it’s also an opportunity to create more of the good jobs that Kentuckians need.

The Medicaid expansion is expected to make coverage available to up to 308,000 Kentuckians, while the exchange will offer insurance to another estimated 332,000. The Medicaid expansion alone will bring over $1.2 billion a year in additional spending in the Kentucky economy by 2015, creating over 15,000 jobs according to an analysis by the University of Louisville’s Urban Studies Institute.

That will create an immediate need to find the skilled workers that can fill those jobs, as described recently by the Courier-Journal and by Deloitte Consulting in a new report for the state. Even before health reform, the state had a workforce shortage in the health care sector. 49 counties are designated Health Professional Shortage Areas in primary care by the federal government, and parts of other counties also qualify. According to a study done last year by UK’s College of Agriculture, Kentucky’s growth in registered and licensed practical and vocational nurses, emergency medical technicians, physicians, health technicians, therapists and other health professionals is not keeping up with broader growth in the health care sector.

The Deloitte study estimates that even to meet existing demand Kentucky needs 5,635 more registered nurses (RN), or 12 percent of the RN workforce; 6 percent more licensed practical nurses; 30 percent more physician assistants; and 19 percent more mental health professionals. While the report identifies a severe shortfall in supply of physicians, it also notes that advanced practice registered nurses and physician assistants—who require less training—could play a greater role in providing some aspects of primary care, an idea supported by a recent Courier-Journal editorial.

Filling the health care workforce gaps will not be easy, but it’s a great opportunity in a state that struggles with high unemployment. A good portion of the jobs could be provided at community health centers and primary care clinics in the rural counties and poor communities that most need jobs. And many of the jobs provide a chance for workers to earn a decent living. By requiring some degree or credential beyond a high school diploma, they offer a better chance of employment and higher wages than other job options.

However, the state will need to ramp up its education and workforce development efforts to meet the challenge. New preliminary state data show a slight decline in the number of degrees and credentials awarded by the state’s colleges and universities in the most recent year. Rising tuition is likely a factor, as is the need for strategies that support students in completing their degrees and well-designed career pathways for students entering the health care sector. The Deloitte report specifically mentions the need for education programs that recruit and train health professionals from rural areas—as well as support programs for small practices in rural and underserved areas.

The weak economic recovery means that jobs are way too scarce in Kentucky, especially good jobs that allow families to make ends meet. Implementing health reform—and the workforce training that should go along with it—is one opportunity to make progress in that area.