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Kentucky is starting to see the benefits of its decision to expand Medicaid through the Affordable Care Act (ACA) in dramatic reductions in the number of uninsured across Kentucky counties and increased use of preventive care services, according to a recent presentation to the Interim Joint Committee on Health and Welfare by Kentucky Medicaid Commissioner Lawrence Kissner.

As seen in the maps below, the ACA has substantially increased the share of Kentuckians with insurance all across the state. In 2012, 75 Kentucky counties had uninsurance rates of at least 17 percent—with 11 of these counties greater than 20 percent. Now, according to Commissioner Kissner, there are potentially no counties with uninsurance rates above 17 percent—and just two counties that fall into the category of 14 to 17 percent of the population being uninsured. The maps indicate that in several southeast Kentucky counties where more than 17 percent of the population was previously uninsured, the uninsured rate may have fallen to less than 5 percent. medicaid expansion map 2012 medicaid expansion map after implementation Source: Lawrence Kissner, “ACA Update,” presentation to the Interim Joint Committee on Health and Welfare July 16, 2014.

Medicaid has also seen increased use of preventive care and screening, which could play an important role in improving the state’s health in the future. According to Commissioner Kissner, in the past year the utilization of an annual dental visit through Medicaid increased by 15.8 percent. Use of adult preventive services increased by 36.7 percent; breast cancer screening increased by 20.6 percent; cervical cancer screening increased by 3 percent; and colorectal cancer screening increased by 16.1 percent.

Commissioner Kissner’s presentation also helps make clear how important Medicaid is as an often temporary safety net for individuals and families in Kentucky struggling to make ends meet. His presentation notes that the state’s Medicaid program experiences a lot of “churn”—there is a consistent influx of new members but a roughly equivalent number who leave the program each year. For instance, only 81 percent of the individuals enrolled in Medicaid in Kentucky in June of 2012 were still enrolled in June of 2013. 151,424 persons had left the program and had been replaced by 153,822 new individuals. Going back to June 2011, only 70 percent of members were enrolled in Medicaid all three years. With Medicaid expansion, more Kentuckians will have the financial and health security that Medicaid provides when they fall on hard economic times, and as they struggle to get back on their feet.

Lopsided Recovery Reflected in Which Revenue Sources Have Grown

Since declining in 2009 and 2010 because of the recession, Kentucky’s General Fund revenues have grown for four straight years. But the state’s different sources of revenue have grown or declined at much different rates. That variation tells a lot about the kind of lopsided recovery Kentuckians are experiencing, and the kind of tax system we need when income growth is concentrated at the top.

Among the major sources, the individual and corporate income taxes have had the strongest growth rates in the recovery. The individual income tax has been responsible for 48 percent of the new revenue Kentucky generated between 2010 and 2014, or $594 million. It’s grown 19 percent over that time period compared to 15 percent growth for the General Fund as a whole.

revenue source growth table
Source: KCEP analysis of Office of the State Budget Director data.

Revenue growth from business taxes has also been strong. Receipts from the corporate income tax and limited liability entity tax (an alternative tax for businesses not organized as corporations) have increased 76 percent since 2010, and are responsible for 23 percent of revenue growth. That’s in line with other states around the country, where high corporate profits since the recovery began have meant strong growth in corporate tax revenues.

In contrast, the sales tax—Kentucky’s second-largest revenue source—has been more sluggish. It grew only 12 percent between 2010 and 2014 compared to 15 percent for the General Fund as a whole. There are two main reasons for the weaker performance of the sales tax. As a tax that is paid more by low- and moderate-income people, it’s been impacted by the scarcity of jobs and weak wage growth. Also, since Kentucky taxes very few services even as they are an increasing share of what people and businesses purchase, the sales tax doesn’t keep up with the overall economy.

Like the sales tax, the individual income tax is also harmed by too few jobs and stagnant wages. But it has fared better than the sales tax because a relatively bigger share of the income tax is paid by wealthier people. And those individuals are doing well. The top 1 percent of Kentuckians took in 49 percent of state income growth in the first two years of the recovery, further widening already growing income inequality.

Together, the individual income tax, sales tax and corporate taxes account for 80 percent of Kentucky’s revenues. The state’s remaining revenue sources have been weak, growing only 0.8 percent over the last four years compared to the 15 percent growth for all General Fund revenues mentioned previously.

Especially problematic are the cigarette tax, which has declined 18 percent; the coal severance tax, which has fallen 27 percent, and property taxes on real estate which have grown only 4 percent. The latter two are hit by the decline in the coal industry and the weakness in the housing market, respectively, while the cigarette tax decline is due to decreasing smoking rates. Lottery revenue has also grown more slowly than General Fund revenues as a whole, reflecting the lack of purchasing power of those who buy lottery tickets.

The weak and lopsided recovery—strong income growth for the wealthy and big corporations, continuing economic challenges for everyone else—has played a big role in shaping the revenue story in Kentucky the last few years. Moving forward, the growth we’ve experienced in the corporate income tax may not be sustained. Businesses must at some point in a recovery begin reinvesting in technology and capital improvements, which will mean tighter profit margins and weaker corporate income tax receipts. Indeed, the official forecast for the next two years predicts that corporate income tax and limited liability entity tax revenues will grow only 0.7 percent in 2015 and decline 1.4 percent in 2016.

The bottom line is that Kentucky’s individual and corporate income tax revenues have kept a very difficult budget situation from becoming much worse by generating faster revenue growth to help make up for slower growth elsewhere in the tax system. As income inequality continues to rise, income taxes become even more important to generating the revenue needed for investments in schools and other areas and doing so in a way that is fair.

Details of Revenue Shortfall Should Not Be Misinterpreted to Support Bad Tax Ideas

A $90 million revenue shortfall for FY 2014 adds to Kentucky’s challenge as the state moves forward into the new two-year budget. It’s important that the right conclusions about tax reform be drawn from the shortfall, and not wrong-headed proposals to further cut the individual income tax and add to Kentucky’s revenue challenge.

State Budget Director Jane Driskell has confirmed that a big contributor to Kentucky’s 2014 revenue shortfall is the “April surprise” we described in a recent blog: in December 2012, many wealthy individuals in Kentucky and other states were incentivized to realize income from capital gains before Bush tax cuts expired in 2013, leading to inflated state income tax receipts in budget year 2013. But those gains were temporary and came at the cost of states’ income tax revenue in 2014.

While Kentucky officials accounted somewhat for the April surprise in their revenue projections, they still overestimated individual income tax gains: the revenue forecast predicted 2.4 percent growth in 2014, yet individual income taxes grew only 0.7 percent or $26.3 million.

Some might use the individual income tax’s slower than expected growth to argue that Kentucky should shift away from income taxes toward a consumption-based tax system. But that would be an incorrect reading of the situation: slower growth is because of this one-time event, and the individual income tax is crucial to Kentucky’s fiscal health. Individual income tax receipts are the cornerstone of the state’s tax system, accounting for 41 percent of total General Fund tax receipts in 2014. And even given a weak year in 2014, the state’s individual income tax has been its strongest source of revenue growth in recent years—much stronger than the sales and use tax as shown below. Less reliance on the individual income tax would have made budget cuts in recent years even worse.

incometaxcornerstone

Source: KCEP analysis of Office of the State Budget Director data

What the longer-term trend in revenue growth continues to show is that “the tax code in Kentucky needs to be more elastic,” as Driskell put it. Along with protecting and strengthening the income tax, comprehensive tax reform should close loopholes in other revenue streams so that our taxes can better keep up with economic growth. Without reform, the General Fund will continue shrinking relative to the economy and Kentucky will keep losing ground on important investments in P-12 education, higher ed, public safety and other areas.

 

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