The Real Threat to Kentucky Manufacturing Jobs

Expect to hear loud concerns next week that new rules to reduce the carbon emissions that cause climate change will harm Kentucky’s economy, including the state’s electricity-intensive manufacturing jobs.

Kentucky has reasons to be concerned about those jobs. Although manufacturing provides only about 12 percent of the state’s employment today, it’s been a critical source of decent-paying jobs for Kentuckians with less than a college degree. Maintaining and even growing a manufacturing sector remains vital to a diverse and innovative state economy.

But the overall jobs impact of the new rules is uncertain. And it’s a wonder why we haven’t been hearing a similar outcry over a threat to those jobs that’s not speculative but real—the broader economic and trade policies that have been shedding thousands of Kentucky manufacturing jobs and put more jobs at risk in the immediate future unless policy changes are made.

Kentucky’s energy use and policies

Concerns about the new carbon emission standards stem from the fact that Kentucky has the most electricity-intensive economy in the United States, including big users like aluminum smelting, iron and steel mills, paper mills, chemical production and glass manufacturing. Forty-nine percent of Kentucky’s electricity is used by industrial customers compared to 26 percent for the U.S. as a whole.

A report by the Kentucky Department of Energy Development and Independence (DEDI) identified a set of scenarios for new greenhouse gas constraints, and projected higher electricity prices and some job losses in most (but not all) of them.

Kentucky is vulnerable in part because it has been unwilling to adjust its energy approach despite rising real electricity prices—which began increasing in the state in 2002—and health and environmental regulations that have been phased in for decades. Even as other states were moving to diversify their energy portfolios and aggressively promoting energy efficiency, Kentucky only took small steps to improve efficiency and has maintained its heavy reliance on coal even as production in the eastern portion of the state began declining in the mid-1990s.

But it’s wrong to conclude anything yet about economic harm from the new rules. The specifics aren’t out yet, and the flexibility the EPA is rumored to be giving states to meet the standards would be a plus. Untapped energy efficiency opportunities are often the cheapest alternative available while the cost of renewable energy technologies is declining rapidly. A study by Synapse Energy Economics for MACED estimated that a state law requiring increases in renewable energy and energy efficiency in Kentucky could result in lower average bills in 10 years than would otherwise be the case and significant net job creation.

While it’s critically important that Kentucky develop a plan to adapt to the new emission rules in ways that protect and grow jobs, other economic policies threaten to wipe out more of Kentucky’s manufacturing economy before potentially higher prices from new emission standards can even begin to play a role.

Trade deficit causing loss of manufacturing jobs

Over the last 15 years, Kentucky has lost 80,000 actual manufacturing jobs—more than one-fourth of the state’s factory employment.

The primary culprit in those losses is not regulations or electricity prices but the rising trade deficit along with the impact of two deep recessions. There are clear actions the federal government can take to shrink that deficit and create and protect jobs, if it were willing to do so.

The major cause of the trade deficit is currency manipulation by other countries and the resulting overvaluing of the U. S. dollar. A group of about 20 countries have been engaging in intentional efforts to artificially lower the value of their currencies relative to the dollar, primarily through government purchase of foreign assets. That makes their exports cheaper and U. S. exports more expensive, leading to the loss of jobs here.

Powerful corporate interests have much at stake in this arrangement, including big manufacturers and retailers who stand to profit from lower production costs overseas. The solutions to the problem are available: Congress could pass pending legislation (here and here) allowing the Commerce Department to treat currency manipulation as an illegal subsidy in trade deals, and make protections against these actions a part of future trade agreements. The administration could also implement strategies to tax or offset purchases of foreign assets by these governments.

Such efforts could create between 31,800 and 82,500 jobs in Kentucky, according to a recent report by the Economic Policy Institute (EPI).

Kentucky’s steel industry is also at specific risk due to a recent surge in imports caused by unfair trade practices. That surge is due to excess capacity in countries like China, South Korea and India that have heavily subsidized their steel industries, resulting in falling prices. That’s put the U.S. steel industry in the red the last two years and at risk of bankruptcy and job loss. Unless the U.S. enforces trade remedy laws—which have been vital to the industry’s survival in the past—Kentucky is at risk of losing up to 10,800 jobs according to another EPI report.

Kentucky’s strategy to protect and create manufacturing jobs shouldn’t be simply to resist measures that address global climate change. While those rules present challenges given Kentucky’s history, they also present opportunities to create jobs in labor-intensive energy efficiency efforts and in growing industries associated with new energy sources. Regardless, the job future for manufacturing will be bleak unless Kentucky also advocates for economic and trade policies that keep that sector from slipping away.

Op-Ed: War on Poverty Efforts Made Real Progress, but There Is Much Work Left to Do

Fifty years ago, President Lyndon Johnson declared an “unconditional war on poverty” in his State of the Union Address. A few months later, he made a historic visit to Inez, Kentucky and the porch of unemployed sawmill operator Tom Fletcher to dramatize its need.

The anniversary of those events has sparked commentary about the effects of the anti-poverty policies and programs the War on Poverty launched.

As more than a dozen economists show in an important new book, Legacies of the War on Poverty, the era’s efforts made a real difference in alleviating the kind of grinding privation that was once common in many parts of the country. Poverty and economic hardship would be much worse today if it weren’t for the efforts begun during the War on Poverty, such as food stamps (now called SNAP), and continued in later decades, like the Earned Income Tax Credit (EITC) and child care subsidies.

In fact, using a comprehensive measure of poverty that takes into account non-cash benefits like food stamps and the EITC, the poverty rate fell strikingly—from 26 percent in 1967 to 16 percent in 2009—according to an analysis by the Center on Budget and Policy Priorities.

These gains came from a commitment to reducing poverty that was broad and robust. In his 1964 State of the Union address, Johnson declared that “no single weapon or strategy will suffice,” and in a few years federal spending on health, education, employment and training, housing and income supports more than tripled.

Those investments yielded substantial benefits for children, workers and families:
• Title 1 funding narrowed the wide gap in spending between rich and poor schools.
• College aid programs, including what became Pell Grants, increased access to higher education for low-income students.
• Head Start programs led to increased school completion rates for poor kids.
• Food stamp and nutrition programs alleviated severe hunger and malnutrition and improved child health and development.
• Expanded access to health care through Medicare, Medicaid and community health centers sharply reduced infant mortality and increased life expectancy.

One of the biggest successes was the rapid decline of senior poverty, due in large part to increases in Social Security benefits and access to universal health care coverage through Medicare. Senior poverty fell from 35 percent in 1959 to just 9 percent in 2010.

Another important but under-recognized contribution was the War on Poverty’s role—in combination with the civil rights legislation of the era—in promoting racial desegregation. New funding for schools, hospitals and housing was contingent on local governments and private groups ending segregation in facilities and addressing discrimination.

Despite these successes, some pundits and politicians have claimed that the War on Poverty was a failure. A more substantive critique is that the efforts didn’t go far enough to reach the goal of eliminating poverty.

One major factor is that the War on Poverty was launched while economic and wage growth in the United States were strong, and it was plausible to believe that a “rising tide would lift all boats.” However, the link between wage growth for low- and middle-income workers and broader economic growth was broken in the early 1970s. While workers’ wages have stagnated since then, incomes at the top have soared. And full employment—meaning a job for more or less everyone in search of work—has been rare and fleeting in the intervening years.

Also incomplete is the War on Poverty’s goal of greater democracy through “maximum feasible participation of the poor” in decision making. Some efforts to increase involvement of the poor on local boards and remove politics from programs were met with strong resistance from local power brokers, including in parts of Kentucky.

But rather than tarnish the rest of the War on Poverty’s record, these shortcomings point out the work still ahead of us. We should protect and build on the gains that were made these last fifty years, while doing more to address the gaps in economic justice and democracy that confront us in our time.

Jason Bailey is director of the Kentucky Center for Economic Policy (KCEP), a nonprofit, nonpartisan institute that conducts research, analysis and education on important policy issues facing the Commonwealth. See more at www.kypolicy.org.

Growing Tuition Tax Credit Denies Students in Poverty Even As Need-Based College Aid is Underfunded

Kentucky’s recently released biennial tax expenditure report, which documents state spending through provisions in the tax code, shows a growing amount of money going to a program called the Postsecondary Education Tuition Tax Credit. This may seem like a positive trend that could increase college affordability for more Kentuckians in the context of rising tuition. But eligibility requirements for the credit that exclude people below the poverty line mean the program may just worsen inequality in access to higher education, especially combined with the underfunding of state need-based financial aid.

Kentucky’s Postsecondary Education Tuition Tax Credit is a nonrefundable credit against individual income taxes created in 2005. Because it is nonrefundable, those whose incomes are too low to owe income taxes—which in Kentucky since 2005 is anyone below the poverty line—cannot benefit from this form of financial aid. At the same time the poor are denied help from this program, families with incomes in the six figures can benefit.

The credit can be claimed for undergraduate tuition and related expenses—for the person submitting his/her income tax return, his/her spouse, or a dependent—at eligible Kentucky educational institutions. When established, the credit was set at 25 percent of the amount recorded on the federal return for the Lifetime Learning Credit (LLC), which provides up to a $2,000 credit for qualified expenses paid for each eligible student, and the Hope Credit, which is not currently available. Any unused credit can be carried forward five years.

Beginning in 2009, at the federal level the Hope Credit was replaced by the American Opportunity Tax Credit (AOTC), a partially refundable credit that offers up to $2,500 per student for qualified expenses. However, those who claim the AOTC have not qualified for Kentucky’s Postsecondary Education Tuition Tax Credit because the state’s tax code has been tied to the federal code as it was on December 31, 2006 (before the AOTC replaced the Hope credit).

This will change for tax return filers in 2014 as House Bill 445, which was recently signed into law, moves the state’s reference date for the federal tax code to December 31, 2013. This means that for state individual income taxes in 2014, the Postsecondary Tuition Tax Credit will be based on both the LLC and the AOTC.

To qualify for the LLC, an individual’s income can be up to $63,000 and up to $127,000 for a married couple filing jointly. To qualify for the AOTC, an individual’s income can be up to $90,000 (income phase-outs occur between $80,000 and $90,000) or a married couple filing jointly’s income can be up to $180,000 (with income phase-outs occurring between $160,000 and $180,000).

Even though the AOTC is partially refundable at the federal level, the state’s credit is still not refundable. Because Kentuckians below the poverty line don’t pay income taxes since a law passed in 2005 (though they do pay a higher share of their incomes in sales taxes than better-off Kentuckians), they cannot benefit from the credit even while those with incomes well over $100,000 can.

According to the tax expenditure report, the Postsecondary Education Tuition Tax Credit is expected to cost an estimated $20.8 million in 2016, compared to $14.8 million in 2012—an increase of 41 percent over that time period.

While Kentucky is investing a growing amount in this tuition tax credit, support for the state’s need-based financial aid programs has largely been flat in recent years. Although the 2014-2016 state budget includes a small increase for both the need-based College Access Program (CAP) and the Kentucky Tuition Grant (KTG), this bump is tiny—especially in light of how incredibly underfunded these programs are. For instance, CAP can only support a third of the students who qualify for the scholarship—leaving over 76,000 empty-handed in 2012-2013.

Research has shown that need-based financial aid is associated with an increase in college enrollment among low- and moderate-income students as well as an increase in college persistence and the number of credits earned. In contrast, tuition tax credits have not been shown to effectively influence decisions to attend college. This is in part because of the delay in benefiting from education tax credits, which are applied for and received long after students enroll, and also because this form of financial aid typically benefits higher income students who would attend college even without scholarships or tax credits.

Given the dramatic and ongoing increases in tuition at Kentucky’s public universities and community colleges, low-income students face many financial barriers to attending and persisting in college. One small strategy for supporting these students and prioritizing need-based financial aid would be to eliminate the state’s Postsecondary Education Tuition Tax Credit and redirect these funds to need-based aid programs like CAP, a recommendation that has been made by Kentucky’s Higher Education Work Group.

Report: Kentucky Adding Low Paying Jobs

State EITC Would Make a Regressive Tax System Fairer

Previous posts have described how a state Earned Income Tax Credit (EITC) would help working low-income Kentuckians make ends meet and reach every corner of the state. A state EITC would also make the tax system fairer, as shown in a new report by the Institute on Taxation and Economic Policy (ITEP).

Kentucky’s tax system has a lot of room for improvement in the area of fairness. Low- and middle-income Kentuckians pay a greater share of their incomes in state and local taxes than those at the top. For instance, Kentuckians with the lowest incomes—under $15,000—pay 9.1 percent of their incomes in taxes while the top 1 percent of earners in the state—with an average income of $759,000—pay just 5.7 percent.

That’s largely because the sales tax is a very regressive tax. The lowest-earning 20 percent of Kentuckians pay 5.6 percent of their income in sales and excise taxes, while the top 1 percent pay only 0.8 percent.

There have been recent proposals to enact a state EITC in Kentucky but little movement on the issue in the legislature. As part of his tax reform plan in the 2014 General Assembly, the governor proposed a state EITC of 7.5 percent of the federal credit, half of what the governor’s tax reform commission had previously recommended as part of a package of recommendations to make the tax system fairer and more adequate, among other guiding principles. In the 2014 session, Representative Wayne introduced a bill with a state EITC at 15 percent of the federal credit, while a bill sponsored by Senator McGarvey proposed a 10 percent EITC. The average state EITC across the country is 16 percent.

The new ITEP report shows how states would fare in five different EITC scenarios—for those without a state EITC: a refundable state credit of 16 percent, 20 percent, 30 percent, 40 percent and 50 percent. As seen below, a refundable state EITC at 20 percent of the federal credit would help working Kentuckians with incomes under $15,000 by returning 1.3 percent of their income they now pay in taxes.

 itep 20 percent credit KY

However, as the graph makes clear, a state EITC alone cannot make Kentucky’s tax system progressive. Even a refundable state EITC that is 50 percent of the federal credit would not reduce taxes for the lowest income group to a share equivalent or below that of the highest income group. That’s why we also need progressive tax reforms that ask a little more of those at the top, who are most able to pay taxes and whose incomes have grown dramatically in recent years while many Kentuckians’ wages have been stagnant.

Kentucky Page in ITEP Report

Cutting State Income Taxes No Way to Attract New Residents

Anti-tax advocates often claim that cutting individual income taxes, especially for those at the top of the income scale, is vital if states want to keep wealthy people at home and attract new residents. But a new report from the Center on Budget and Policy Priorities shows that personal income tax rates have little to no effect on where people live. Relatively few people relocate from state to state, and those that move do so primarily for job opportunities, family considerations, warmer climates and lower housing costs.

Besides being wholly unsupported by data, the erroneous notion that state income tax levels determine migration patterns threatens the public services that do matter to people whether re-locating or choosing to stay put; cutting Kentucky’s income taxes, for instance, would leave the state with less revenue to invest in the foundations of a strong economy—good schools, safe and attractive neighborhoods, affordable higher education and other public services.

Kentucky is already struggling to keep up its investments, and shifting away from the income tax would exacerbate the problem without providing the promised influx of wealthy, educated entrepreneurs (or any migrants, for that matter) to the state.

The report, “State Taxes Have a Negligible Impact on Americans’ Interstate Moves,” compiles data and reviews the literature over the last two decades on the relationship between state taxes and migration, which clearly indicate that state taxes have a negligible effect on the decisions people make about where to live. In particular, the report shows that:

  • Interstate migration is small, getting smaller, and the overall population effects are minor: Of the few Americans who do move across state lines each year—about two people per 100—most cite jobs or family as the reason for relocation. And because the rate of in-migration and out-migration is generally on par for most states, the overall effect on any one state’s population is small. In fact, no state lost population overall between 2000 and 2009 due to out-migration.
  • Just as people move to states without income taxes, so do they move in significant numbers to states with higher income taxes. For example, between 1993 and 2011, 250,000 people moved from income tax-free Texas to income-taxing California. Five states with income taxes attracted more migrants from Texas than they lost to Texas. And more than twice as many people moved to North Carolina than moved to no-tax Tennessee, despite the fact that North Carolina’s income tax rate was the highest of all Sunbelt states during that time.
  • Low- to moderate-income households are more likely to move to no-income-tax states than are the wealthy, by roughly the same ratio as their share of the population. Between 2008 and 2012, 21 percent of people moving from California to Texas had incomes over $100,000, while 30 percent of people moving from Texas to California did. And between 2005 and 2011, there was net in-migration to California among the very wealthy. If taxes did play a big role in migration patterns, it would make sense for a larger share of wealthy households—for whom income tax rates are higher—to migrate to low- or no- tax states.
  • Climate plays a big role in migration from “Snowbelt to Sunbelt states”—a long-standing trend in migration patterns—largely independent of taxes. No-income tax Florida does draw the biggest number of these warm-weather-seeking migrants, but the difference is largely attributable to the significant share of retirees moving there for the considerable infrastructure the state has to accommodate them. Retirees are not likely to be entrepreneurs who directly create new jobs, and the demand they do create for employment is significantly in the low-wage service sector.

Cutting income taxes has been offered as a panacea for what ails Kentucky, but research and common sense cast doubt on potential gains and confirm big losses. The more certain way to buttress Kentuckians’ quality of life and economic opportunities is to invest in education, health and infrastructure. Doing so costs money that the state’s income tax generates in a fair and sustainable way.

Op-Ed: Exploiters of Job Losses Paint Wrong Picture of Cause

Published in the Floyd County Times on May 8, 2014

Recent sudden job losses at Kentucky’s last Fruit of the Loom plant in Jamestown and at Toyota’s regional headquarters in Erlanger have hit the state hard.

They’ve also prompted wrong-headed claims that Kentucky brought this on itself by not pursuing certain economic policies—that Kentucky is getting something wrong that other states are getting right.

But those making such claims are exploiting real human and economic tragedies in an effort to further arguments that don’t hold up to scrutiny.

Those arguments draw on a ready-made tale about Texas, where 1,000 of the Toyota jobs are headed. Texas, so the story goes, has experienced an economic miracle in recent years, luring businesses and people from around the country because of policies that weaken unions and its lack of an income tax, among other things.

But there’s absolutely no evidence that Kentucky is losing economic ground to states with less commitment to economic fairness, which is what such policies exhibit.

Kentucky is as successful as any state in attracting businesses, winning in some cases and losing in others. Look no further than Toyota itself, which while closing its Erlanger facility is also reinvesting in its Georgetown plant in order to build the Lexus ES 350 there, adding 750 jobs. Most often, corporate location decisions are driven by factors like proximity to suppliers and markets, the skills of the workforce and the quality of roads and other infrastructure.

Indeed, Toyota’s decision to move jobs from Erlanger to Plano, Texas is based on gaining efficiencies, not cutting costs. Toyota decided to consolidate multiple headquarters from across the country in one facility, and Plano is a more central location between the two coasts and is close to an international seaport (in Houston) and high-quality airport (in Dallas).

More broadly, the story of the so-called Texas miracle is not as rosy as its boosters claim. It’s true that Texas has had substantial job and population growth in recent years. But that’s been driven by a high birth rate, international immigration, cheap housing and an oil and gas boom rather than anti-tax and anti-labor policies.

And Texas faces real challenges because of its policy choices. It has the highest share of minimum wage workers of any state. One-fourth of Texans lack health insurance, and the state ranks in the bottom 10 in funding for public schools.

Those claiming Kentucky should be more like Texas are saying that we will make ourselves richer only if we make ourselves poorer. But a race to the bottom in wages, funding for public services and living standards is no formula for prosperity.

Why not just follow that logic further and say we should be more like Honduras—the new home of those Jamestown Fruit of the Loom jobs? Those jobs moved to Honduras because garment workers there make only $246 a month on average, according to a Center for American Progress study, and have seen their wages fall 14.6 percent in the last 10 years.

There’s another path to prosperity in Kentucky that doesn’t involve lowering our standard of living. It centers on investment in the foundation of economic growth—particularly education, health and infrastructure—doing more to spur entrepreneurship and innovation, and making Kentucky a better place to live. That’s the secret in states with the lowest poverty and the highest incomes.

While we’ve got a long way to go in Kentucky, there are also things we are doing right. We’ve had several decades of progress in education. We’re cutting back our spending on prisons and jails, freeing up those funds for other needs. And we’re making strides to improve health and economic security by providing uninsured Kentuckians access to coverage through kynect.

We should build on these successes, and ignore tall tales about what will grow our economy.

Jason Bailey is director of the Kentucky Center for Economic Policy (KCEP), a nonprofit, nonpartisan institute that conducts research, analysis and education on important policy issues. 

Estimate of the Cost of State Tax Breaks is Slashed

Pension System Review Could Up Taxpayers’ Costs

More than 800 Kentucky Schools Eligible in 2014-2015 To Combat Child Hunger By Increasing School Meal Participation

lunchlineMore than 800 Kentucky schools will qualify for the Community Eligibility Provision (CEP) this coming school year, a federal initiative that increases the number of children eating school meals and reduces administrative paperwork associated with meal programs by providing breakfast and lunch to all students at high poverty schools, free of charge.

Kentucky is one of eleven states that have participated in the program’s initial roll-out since 2011. In 2014-2015, eligible schools in all states will be able to join, as will those Kentucky schools that have not yet opted in. Eligible schools have until June 30, 2014 to decide whether or not they will participate in the 2014-2015 school year.

CEP currently reaches 152,669 children in Kentucky, representing more than one in five students. During 2013-2014, 372 Kentucky schools participated.

Early results show that CEP is leading to more children eating school meals in Kentucky, particularly breakfast. In the first two years of implementation, breakfast participation in CEP schools grew from 45 percent to 64 percent. By providing breakfast to all students, the program allows for alternative delivery methods and removes barriers to participation: breakfast in the classroom and “grab and go” kiosks in the hallways after first period, for instance, mean that late buses, crowded cafeterias and the stigma associated with free and reduced-price meals no longer keep students from getting a nutritious start to their day.

“Community eligibility has been successful in reaching Kentucky’s low-income children whose families may be struggling to put food on the table,” stated Anna Baumann, policy associate at the Kentucky Center for Economic Policy. “The more eligible Kentucky schools that take part in the program, the more Kentucky kids will have at least two good meals a day, helping them to succeed in the classroom and improving their health and long-term well-being.”

A majority of students at CEP eligible schools qualify for free and reduced-price meals. But instead of relying on the traditional school-wide application process for federal meal programs, CEP identifies these students through another program with a rigorous eligibility determination process, like the Supplemental Nutrition Assistance Program (SNAP) or Medicaid.

As a result, CEP not only reduces hunger for greater numbers of low-income students, but it also helps food service departments streamline their operations and reduce paperwork. When more children eat, the per-meal cost of serving meals decreases. These economies of scale, combined with administrative simplifications, help to cover the cost of providing meals to students who might otherwise pay. Greater participation, increased federal reimbursements and additional revenue from a la carte purchases have allowed some Kentucky schools to improve meal quality, as well.

Baumann continued, “Kentucky’s early success with CEP and development of best practices since 2011 are good news for schools considering the program in 2014-2015. Adopting the program is an important investment in students who might otherwise struggle to get enough food to eat each day.”

###

More information about Kentucky’s Community Eligibility Provision can be found here: http://education.ky.gov/federal/SCN/Pages/Community-Eligibility-Option.aspx.