In Kentucky, Who’s to Blame for Coal’s Decline?

Op-Ed: Kentucky Budget Falls Short

Published in the Cincinnati Enquirer on April 6, 2014.

While it is good to see the chambers of the Kentucky General Assembly come together to pass a budget, the new budget falls short of what it will take to make needed progress in Kentucky.

It contains the 14th round of cuts since 2008 – cuts that have deeply impacted the public services that make Kentuckians healthier and more educated, our communities safer and more attractive, and our economy stronger. This budget does not adequately invest in many areas – ranging from human services to environmental, worker and public protection – and does not properly address the unfunded liability in the teachers’ retirement system, meaning higher costs down the road.

The budget harms higher education students by including more cuts to universities, community colleges and adult education, deeply underfunding need-based financial aid (despite a small bump) and imposing a new fee of up to $240 a year for full-time community college students rather than a more progressive financing method for construction projects. The ongoing shift in the cost of higher education to students is driving up personal debt and contributing to growing inequality in Kentucky.

The dollars put back into K-12 education and a few other areas in this budget provide a respite from cuts, but are only enough to allow programs to tread water. An exceptional bright point in the budget is the $18 million in 2016 for expanded access to pre-school.

But the revenue bill accompanying the budget includes new phased-in tax cuts that will erode revenue in future years, including a cut for the profitable bourbon industry and in the wholesale alcohol tax.

Kentucky will not have the resources it takes to support a strong state economy until the Legislature makes the right reforms to the inadequate state tax system. That should be the next task ahead of the General Assembly.

Jason Bailey is director of the Kentucky Center for Economic Policy.

Bill’s Last-Minute Tax Breaks Raise Questions

Tax Break Bill a Setback for Revenue System

Tax CutThe General Assembly inserted some last minute tax breaks benefiting powerful interests into House Bill 445—the revenue bill that accompanied the new budget—before passing the bill and adjourning for the veto period. Those new tax breaks were never part of House Bill 445 in its previous versions, and will cost the state a reported $29 million annually in future budgets.

As in some of the earlier versions of House Bill 445, the version that passed did include some positive changes. One measure updates the state’s relationship to the federal income tax code to 2013; currently the state income tax is tied to the code as it existed in 2006. That update makes preparing state income tax returns less complex. Also, the update was done in a way that prevents an income tax cut to wealthy individuals that would otherwise occur because of Congress’ weakening of the limit on itemized deductions a couple of years ago.

The final bill also clarifies that the state can collect taxes on instant racing and that taxes collected the last few years are legal, although it sets a lower tax rate on instant racing than the House had proposed meaning no net new revenue gain. HB 445 also creates a tax on advanced deposit wagering, extends the waste tire fee that would have otherwise expired and allows the lottery to advertise that (most of) its net revenues go to college scholarships.

Offsetting these positive measures, however, six new, costly tax breaks were inserted into the bill while it was in conference committee. There is no legislative fiscal note detailing the bill’s total impact on revenues. But according to unofficial reports, the bill will cost $10 million this biennium and at least $29 million a year upon full implementation.

The new tax cuts and credits were as follows:

Income tax credit to the profitable bourbon industry for property taxes paid.

This measure provides an income tax to distillers for the amount they pay in property taxes on bourbon that is aging in barrels. The amount of the credit begins at 20 percent of property taxes paid and increases to 100 percent in 2019. The bill says the savings from the credit must be used for “capital improvements,” but simply buying barrels and pallets are among the acceptable expenses—in other words, the requirement doesn’t guarantee investments that will create jobs or strengthen the industry. This credit will cost $13.3 million a year once fully implemented according to an earlier state estimate.

Cut in the wholesale tax on beer and wine.

Currently, distributors pay a wholesale tax on the sale of alcohol of 11 percent, but this measure cuts it to 10 percent for sales of wine and beer. The cut is phased in over a period of years and goes fully in effect in 2018 at a loss of about $7 million to the state. Kentucky applied the sales tax on the retail sale of alcohol just five years ago to help address the state’s budget woes, and this measure reduces needed revenues.

Doubling of the New Markets Tax Credit cap from $5 million to $10 million.

In 2010 the state passed legislation creating a New Markets Tax Credit program that mirrors a federal program. It provides a tax credit of 39 percent for investments in entities that, in turn, loan or invest the funds in businesses in economically distressed areas. The program provides a tax credit to companies that make the investment. The program had a cap of $5 million a year, and this change doubles the cap to $10 million meaning a $5 million additional cost to the General Fund.

Deletion of the expiration date on the film tax credit program and removal of its cost cap.

The General Assembly created a film tax credit in 2009 to entice motion picture companies to produce films in the state. The tax credit had been capped most recently at $7.5 million a year and was set to expire in 2015. The House version of HB 445 proposed to extend the expiration date for two years and set a cap of $1 million a year. The final version that passed extends the program indefinitely and includes no cap. Film tax credits are notably problematic (costing more than they return to states) and Kentucky’s is especially aggressive since it is refundable—meaning that film companies gets cash back from the state if the credit is larger than their tax liability.

Creation of a historic preservation tax credit targeted to two developments in Louisville and Lexington.

A measure in HB 445 creates a new tax credit reportedly targeted to the Whiskey Row development in Louisville and the 21c Museum Hotels project in Lexington. The program provides a 20 percent credit on expenses up to $30 million (meaning a maximum credit of $6 million) for non-residential projects that are at least $15 million in size, are started by mid-2015 and are located in downtown Lexington or Louisville. The credits are both refundable and transferrable—meaning they can be sold to others or used regardless of tax liability.

Creation of an angel investor tax credit program.

HB 445 also creates an income tax credit for individuals who invest in high-tech businesses that have less than 100 employees and at least half of their assets, operations and employees in Kentucky. The credit is equal to 40 percent of the investment, and 50 percent if the company is in a distressed county. The cap on cost from the program is $3 million a year and $40 million for all years.

The bourbon industry and angel investor tax credit included in the bill were two of the 54 recommendations from Governor Beshear’s Blue Ribbon Commission recommendations, but the commission intended for them only to be considered as part of a larger package that raised significant new revenues for the state. And the other tax breaks were never in the commission recommendations.

Also, the final version of the bill included two changes from the House version that will or could mean lost revenue. The House version froze the average wholesale price used to calculate the gas tax rate at the level it was at the end of 2013, preventing a cut in the gas tax from a drop in fuel prices. Removing that measure makes the gas tax 2.2 cents per gallon lower and means a loss of about $107 million to the Road Fund over the next two years. Also, it means the gas tax is vulnerable to further price decreases and more revenue losses.

Additionally, the final bill took out a measure included in the House version that clarified the legality of library districts’ past decisions on the local property taxes they collect. Controversy over a technical aspect of setting those property tax rates has led to litigation. Without the language clarifying the legality of decisions already made, libraries are at risk of having to refund millions of dollars collected over the past few decades if a court ruling is unfavorable.

The new tax breaks included in the final revenue bill are part of an ongoing pattern with the legislature. Nearly every time the General Assembly convenes, it passes several new tax breaks for particular industries or activities. Such breaks are typically put in the tax code and never revisited, evaluated or scaled back in any way, even while the state budget continues to be cut.

As a whole, tax breaks of this kind are gradually eroding the revenue Kentucky needs to sustain adequate investment in its schools, health and other areas that help people and businesses in the state thrive.

For more, see media coverage of House Bill 445 here, here and here.

New Budget Will Worsen Kentucky’s College Affordability Problem

The budget passed by the General Assembly on Monday does not contain good news for higher education students in Kentucky. The 1.5 percent cuts to the state’s public universities and community colleges, new fee for community college students, and only a tiny boost to state need-based financial aid programs mean that the college affordability problem in Kentucky will continue to grow.

As described in a previous post, the cost of attending college in Kentucky has grown and is now relatively high compared to other states, and the new budget will compound this problem. Repeated decreases in state funding over the years have been the driving force that has led tuition to triple since 1998. The additional 1.5 percent cut means that funding for the state’s public higher education institutions will have declined by 27 percent between 2008 and 2016 after adjusting for inflation.

For the state’s community college students, the budget’s $8 per credit hour fee to finance construction projects throughout the Kentucky Community and Technical College System (KCTCS) is itself a 5.6 percent increase in tuition, and Kentucky’s community college tuition costs are already the 11th highest in the nation.

These increased costs will especially impact low-income students, many of whom attend community colleges. Low-income students’ decisions about whether or not to attend college are more sensitive to college costs, and the number one reason KCTCS students report for withdrawing from school is finances. The three-year graduation rate for Kentucky’s community college students is just 13 percent, and for low-income students it is under 12 percent.

The estimated full-time cost of attendance at KCTCS (including housing and transportation, among other costs) is over $14,000 a year. These costs are becoming a barrier to degree and credential completion, especially when you take into account potential lost income from reducing work hours in order to attend school. For instance, a student working for $8 an hour would earn approximately $16,640 a year at 40 hours a week. Reducing work to 20 hours while taking college classes would mean forgoing $8,000 a year in income. This is especially an issue for adult students—and the majority of community college students fall into that category.

In addition, Kentucky does not adequately invest in state need-based financial aid programs that could help to mitigate the dramatic rises in tuition. Both the need-based College Access Program (CAP) and Kentucky Tuition Grant (KTG) are dramatically underfunded. The General Assembly may have given a tiny bump in funding to these scholarship programs—an additional $1.5 million over the biennium to both CAP and KTG—but it isn’t enough to even begin to make a dent in the large number of students who qualify for but are denied aid due to lack of funds (over 76,000 for CAP and more than 10,000 for KTG in 2012-2013).

The budget’s small increase in CAP and KTG funding also pales in comparison to the many more millions of dollars in lottery money that are being diverted from these programs each year. In addition, CAP and KTG are treated equally with the funding boost—although only CAP is truly targeted to students with the least financial resources. While CAP eligibility is determined by financial need, with KTG—which is for students who attend a private college in Kentucky—eligibility is based primarily on the cost of the college rather than the financial need of the student. More than 29 percent of KTG funds went to those with family incomes of more than $75,000 a year while less than 2 percent of CAP monies were disbursed to those in this income category.

Federal need-based Pell grants are often cited as a means of keeping college affordable for low-income students—especially at community colleges where a large share of students receive Pell—even with rising tuition and lack of state financial aid. However, Pell grants have lost much of their purchasing power. While in the 1970s Pell covered nearly 80 percent of tuition, fees, and room and board at public four-year institutions, today it pays for less than a third of these costs. Students who receive Pell are actually more than twice as likely to have student loans and have greater student debt than higher-income students who do not receive Pell.

As seen below, the maximum Pell grant covers just 40 percent of the estimated cost of attending KCTCS in 2013-2014. The maximum Pell award will increase by $85 next year, but that is far from enough to cover the unmet need for the state’s students—especially when factoring in increases in tuition and fees.

Pell KCTCS tuition graph

Source: Elizabethtown Community & Technical College; U.S Department of Education, Federal Student Aid.

In addition to financial barriers, community college students face other challenges that make completing a degree more difficult and would benefit from greater investments in student supports. Lack of access to services like intensive academic advising and career counseling lowers completion rates and extends the time students spend to get a degree, driving up costs further. Such investments are unlikely, however, given this new round of budget cuts.

How to Spend 20 Billion Dollars

Economic Policy Expert – Proposed State Budget Doesn’t Do Enough to Correct Revenue Shortfalls

Progressives Say Legislature Missed an Opportunity When It Approved Bourbon and Alcohol Tax Breaks

Statement on Budget that Passed the General Assembly

KCEP Director Jason Bailey released the following statement today:

“While it is good to see the chambers of the General Assembly come together to pass a budget, the new budget falls short of what it will take to make needed progress in Kentucky. It contains the 14th round of cuts since 2008—cuts that have deeply impacted the public services that make Kentuckians healthier and more educated, our communities safer and more attractive, and our economy stronger. This budget does not adequately invest in many areas—ranging from human services to environmental, worker and public protection—and does not properly address the unfunded liability in the teachers’ retirement system, meaning higher costs down the road.

The budget harms higher education students by including more cuts to universities, community colleges and adult education, deeply underfunding need-based financial aid (despite a small bump) and imposing a new fee of up to $240 a year for full-time community college students rather than a more progressive financing method for construction projects. The ongoing shift in the cost of higher education to students is driving up personal debt and contributing to growing inequality in Kentucky.

The dollars put back into K-12 education and a few other areas in this budget provide a respite from cuts but are only enough to allow programs to tread water. An exceptional bright point in the budget is the $18 million in 2016 for expanded access to pre-school.

But the revenue bill accompanying the budget includes new phased-in tax cuts that will erode revenue in future years, including a cut for the profitable bourbon industry and in the wholesale alcohol tax. Kentucky will not have the resources it takes to support a strong state economy until the legislature makes the right reforms to the inadequate state tax system. That should be the next task ahead of the General Assembly.”

General Assembly Passes Budget Containing 14th Round of Cuts Since 2008

The General Assembly has passed an austere budget that includes further cuts, flat-level funding or modest increases to the education, health and safety, human services and other programs that Kentucky relies on. Most of these areas have been cut deeply through the 13 previous rounds of budget cuts that the legislature has made since 2008. The budget utilizes fund transfers and monies drawn from the rainy day fund, increases state debt and was passed with a revenue bill that includes new tax cuts.

Budget Agreement Brief

14th round