Corporations Shouldn’t Get Pass on Local Option Sales Tax

Large, profitable corporations are now saying they shouldn’t have to pay their share if the legislature moves forward with putting a local option sales tax on the ballot, according to an Associated Press story.

The article reports that an organization representing large utility customers such as General Electric and Ford says that businesses could face paying an extra $24 million from the new sales tax on their industrial electricity purchases. The AP cites the Senate majority leader saying that creates a problem for the bill in his chamber and the House speaker saying these companies could “easily be exempted.”

But Kentucky already has a problem with tax fairness when it comes to the taxes corporations pay versus everyone else. It’s the case, for example, that corporate income taxes in Kentucky (including corporate license taxes and the limited liability entity tax) have fallen from 11.6 percent of state General Fund revenue in 1989 to 7.1 percent last year—even though corporate profits are at a record high. That’s in part because of a growing set of tax breaks that let companies out of paying taxes and corporate tax loopholes the state hasn’t yet closed.

Kentucky’s top corporate income tax rate is six percent and the national average is 6.25 percent, but because of loopholes and tax breaks, many profitable corporations end up paying a lot less. General Electric, for example, made $27.9 billion in profits over five years according to a report released last year, but paid corporate income taxes to all states at only a 1.7 percent rate. The report details “in stark terms just how successful large, multistate and multinational corporations have become at shirking their tax responsibilities to state and local governments,” and points to economic development tax breaks, use of tax shelters and changes in federal tax laws causing much lower state taxes paid than should be expected.

Letting corporations out of the proposed sales tax would make the tax even less fair. As seen in the graph below, it’s already the case that the lowest-income Kentuckians would pay far more as a share of their income than would the richest 1 percent. That’s how sales taxes work, even with existing exemptions for food, prescription drugs and residential utilities.

lost

Source: Institute on Taxation and Economic Policy

Businesses benefit greatly from public investments in infrastructure, education, health and other areas that improve their workforce and make them more competitive. It’s only reasonable that they also pay their share toward the cost of such investments.

Kentucky has much to do to make its current tax system fairer without finding ways to create new inequities.

New Gallup Poll Shows Kentucky Now a Leading State in Insurance Coverage

Kentucky is a standout state in reducing the share of people without health insurance, rocketing from 39th to 11th among the states in its rate of uninsured according to a new Gallup poll.

The poll shows that Kentucky’s uninsured rate dropped from 20.4 percent in 2013 to 9.8 percent in 2014; even better than a midyear estimate from Gallup of 11.9 percent. Kentucky had the second sharpest one-year reduction in uninsurance rates for adults in the nation.

new gallup poll health insurance feb 2015 table.docx

A big reason for Kentucky ranking so high is the state’s decision to expand Medicaid. A recent independent study on the Medicaid expansion in Kentucky showed that 310,000 Kentuckians enrolled in Medicaid through the expansion—compared to initial projections of 147,634. The new study also indicates that the expansion is making an important contribution to the state’s economy; it is now estimated to have a positive cumulative impact of $30.1 billion on Kentucky’s economy through 2021 (the original projection was $15.6 billion).

Kentucky choosing to set up its own state health insurance exchange, Kynect, may also be a factor in the state’s success in dramatically lowering uninsurance rates. According to Gallup, the uninsured rate declined more in states that both chose to expand Medicaid and set up their own state exchanges or partnerships in the health insurance marketplace. In the 21 states that implemented both of these actions, the uninsured rate declined 4.8 points, compared with just a 2.7-point drop across the states that implemented only one or neither. For states that did not participate in either, the gap in uninsured rates existing in 2013 between them and those that both expanded Medicaid and set up their own state exchanges or partnerships nearly doubled in 2014.

Two surveys—by the Centers for Disease Control and the Urban Institute—have been collecting health insurance data quarterly, and their latest reports also indicate further gains in health insurance coverage in 2014, particularly for states that expanded Medicaid. However, state level data is largely unreported by these surveys. Census data won’t show the full effect of the ACA thus far until September.

But the Gallup poll, coupled with the recent report of the economic impact of Medicaid expansion, suggests remarkable success.

new gallup health insurance feb 2015 table2

Source: Gallup

Bill Would Provide Greater Retirement Security for Workers at Kentucky Small Businesses

A concerning number of Americans are financially unprepared for retirement, and a contributing factor is that many lack a retirement plan offered through their jobs. But a bill in the Kentucky House of Representatives would help by providing a retirement savings option for the thousands of Kentuckians who work for small businesses that don’t currently offer a plan.

A financially secure retirement is often described as a three-legged stool:  retirees need Social Security, a pension plan and retirement savings to make ends meet in their later years. But too many people now approach retirement counting on Social Security and little else. In Kentucky the median household income for those over age 65 is only $33,000 a year according to Census data, and 30 percent of households bring in less than $20,000 annually.

Nationally, 45 percent of working-age households do not own any retirement account assets. And the typical household has just $3,000 in a retirement account—$12,000 for those nearing retirement. Low-wage workers are especially unlikely to have retirement savings.

One major reason is that less than half of workers have access to a retirement plan through their workplace, and the share has been declining since the early 2000s, as shown in the chart below for Kentucky. AARP reports that 787,000 Kentucky workers lack a job-related retirement plan.

employer-provided retirement plan graph

Source: Economic Policy Institute analysis of Current Population Survey data. Universe is private-sector wage and salary workers age 18-64, who worked at least 20 hours per week and 26 weeks per year. Includes both defined-benefit pensions and defined contribution (401k) plans.

Research indicates that people will save for retirement if given an option, particularly if several key features are included. Workers are much more likely to participate if they are automatically enrolled in a retirement plan rather than having to elect to join. They also are more likely to take part if the investment options are fairly limited and straightforward. And they’re more likely to retain their retirement savings if their plan is portable between jobs; otherwise, people often cash out plans when switching employment, and the average worker now has 11 jobs just by the age of 46.

Offering retirement plans at the workplace is especially difficult for small businesses. Plans are more expensive because administrative costs are spread over fewer employees than in the case of large companies and small businesses have less leverage with retirement plan providers to bargain for favorable terms. Small business owners also often lack the time and expertise to set up retirement plans.

House Bill 261 in the 2015 Kentucky General Assembly would help more workers at small businesses save for retirement by establishing a new state-wide plan called the Kentucky Retirement Account (KYRA). It’s based on a model that more than 20 state legislatures are considering this year. Similar legislation has been enacted in Massachusetts, California and Connecticut, and Illinois passed a law creating such a program in January.

HB 261 incorporates the best practice features mentioned above: it establishes a default employee contribution of three percent of salaries into accounts, although employees can choose to contribute a different amount or opt out entirely; it provides a portable benefit that employees can take between jobs; and it offers a simple default investment option based on a worker’s age.

The new plan would be available at no risk to employers, who must simply deduct contributions from employees’ paychecks and remit them to the plan to participate. The plan could help small businesses attract and retain skilled employees that they would otherwise lose to large employers who are better able to provide a retirement plan.

By offering a program state-wide, KYRA can achieve economies of scale across many small businesses and therefore keep administrative costs low. HB 261, which has no fiscal cost to the state, would establish a board connected to the State Treasurer that would contract with a private vendor to manage the program, similar to the state’s existing deferred compensation plan for public employees.

The lack of retirement savings and the decline of traditional defined benefit pensions make for a growing crisis in retirement security in the coming decades. HB 261 is one step Kentucky could make to help address the challenge.

Minimum Wage Bill Flounders in Senate

Misclassification Harms State Budget as Well as Workers

House Bill 256 would help Kentucky workers as well as the state’s budget by cracking down on the growing problem of misclassification of workers as independent contractors, with a focus on Kentucky’s construction industry.

Misclassification occurs when an employer incorrectly classifies a worker as an independent contractor rather than an employee. While an employee’s work is directed by an employer, independent contractors are legally considered to be in business for themselves and are not supposed to be subject to the full-time direction of an employer. According to the Internal Revenue Service, “the general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.” Employers increasingly misclassify their employees as independent contractors in order to reduce labor costs, so that they do not have to pay their unemployment insurance and workers’ compensation premiums (which are higher in construction than other sectors).

A recent survey of research indicates that 10 to 30 percent of employers—possibly more—misclassify their employees as independent contractors. Some employment sectors are more likely than others to misclassify—for instance, the construction industry has a high rate of misclassification. According to a 2011 study of Kentucky’s unemployment insurance audits for 2007-2010, on average 26.4 percent of construction employers misclassified workers as independent contractors.

misclassified workers graph

Source: Michael Kelsay and James Sturgeon, “The Economic Costs of Employee Misclassification in the Construction Sector in the Commonwealth of Kentucky,” September 14, 2011.

The audit also showed that 41.5 percent of construction firms in Kentucky found to be misclassifying workers had three or more misclassified employees. Twenty-five percent of the firms found to be misclassifying had five or more misclassified workers.

Being misclassified as an independent contractor is harmful to Kentucky’s workers who lose protections designed to help employees—including minimum wage provisions, overtime pay, worker health and safety laws, medical and family leave requirements, workers’ compensation insurance for injuries suffered on the job and unemployment benefits if laid off. Independent contractors also pay more in taxes as they are required to pay both the employee and employer share of Medicare and Social Security taxes—double what regular employees pay.

The misclassification of workers is also harmful to the state. According to the 2011 study of Kentucky’s construction sector the total revenue loss from that industry alone was approximately $11.28 million a year:

  • The state lost $6.13 million a year of state income tax revenues from the construction sector due to an estimated 30 percent of the income of misclassified workers in Kentucky not being reported.
  • Kentucky’s unemployment insurance system—which has had an exhausted trust fund since 2009 and had to borrow money from the federal government to help make benefit payments—lost an estimated $1.75 million each year in the construction sector from 2007 to 2010 due to unemployment insurance taxes not being levied.
  • The state’s worker’s compensation fund lost $3.4 million a year in premiums.

The total amount of state revenue lost from worker misclassification across all industries is potentially much larger. A study of Indiana put the annual income tax revenue loss at $147.5 million, and an Ohio study estimated a range from $21 million to $248 million.

In addition, the misclassification of workers damages the fairness and legitimacy of the bidding process by putting employers who play by the rules at a competitive disadvantage. Those who misclassify employees as independent contractors can reduce their payroll costs by approximately 30 percent.

House Bill 256 would address the problem of the misclassification of workers in the construction industry in Kentucky by:

  • Assessing a civil penalty for misclassification of up to $1,000 for the first violation and up to $5,000 for each subsequent determination within a five year period.
  • Disqualifying construction firms found to have misclassified workers twice or more within a five year period from being awarded a state contract for two years.
  • Establishing a clear, in-depth definition of independent contractor.
  • Outlining a process by which a worker can file a complaint about misclassification and a course of action if the employer is found to have misclassified a worker.
  • Putting in place protections for workers who file misclassification complaints.
  • Requiring construction worksites to post a statement describing the responsibility of independent contractors to pay taxes, the rights of employees to federal and state workplace protections, the penalties for misclassifying workers and information about how to file a complaint or inquire about employment classification status.

House Bill 256’s proposed efforts to decrease misclassification would make life better for Kentucky’s construction workers, level the playing field for employers who treat their workers fairly and generate revenue to help with the state’s many needs.

Shortchanging Our Schools

Kentucky Must Reject Deeply Dangerous Call for Constitutional Convention

A proposal that could throw the country into chaos and jeopardize the U. S. Constitution is being pushed in states across the country this year, and in the Kentucky legislature as of Friday.

A growing number of states have petitioned Congress for a constitutional convention on a balanced budget amendment, and more legislatures are looking at the issue this year. Kentucky Senate President Robert Stivers filed the state’s version as Senate Joint Resolution 132.

If 34 states pass resolutions like SJR 132, Congress must call a convention under Article V of the U. S. Constitution. It would be the first constitutional convention since the founding meeting in 1787; all 27 prior amendments to the Constitution were enacted by the method of congressional passage followed by state ratification.

Proponents claim that 24 of the necessary 34 states already have live applications calling for a convention, and eight states have adopted resolutions just in the last four years: Alabama in 2011, New Hampshire in 2012, Ohio in 2013 and Florida, Louisiana, Georgia, Michigan and Tennessee in 2014.

Advocates—led by big corporate interests like the American Legislative Exchange Council (ALEC) (see here and here) —are targeting about 15 states, including Kentucky. SJR 132 is drawn practically word-for-word from ALEC model language. As part of this campaign, Ohio Governor John Kasich has been touring states promoting the idea this year.

BBA

A convention could lead to extreme, wide-reaching and unpredictable changes to the U. S. Constitution and Bill of Rights, and the balanced budget amendment itself threatens to make economic downturns deeper and more painful while resulting in harmful cuts to the services on which Kentuckians rely.

States cannot control a constitutional convention

Although ALEC claims that the agenda of a constitutional convention could be controlled, experts say that conventioneers would have the power to alter anything and everything about the United States government—just as they did in the original 1787 constitutional convention when they threw out the Articles of Confederation and started over.

A convention would likely open up the Constitution to whatever amendments its delegates chose to put forward, regardless of its originally-stated purpose. Senate legislation accompanying the resolution in the General Assembly purports to control the actions of any Kentucky delegates to a convention, but it’s unlikely the courts would back the states in a conflict, experts say. Delegates to the 1787 convention ignored their state legislatures’ instructions, and delegates likely would be subject to federal, not state, law.

There are no safeguards to prevent a runaway convention that could lead to harmful changes to our founding document, as the Constitution itself puts no authority above a convention. And powerful interests are likely to be first in line to wield influence on who gets selected as delegates and what agenda gets considered. As former Chief Justice Warren Burger said:

“[T]here is no way to effectively limit or muzzle the actions of a Constitutional Convention. The Convention could make its own rules and set its own agenda. Congress might try to limit the convention to one amendment or one issue, but there is no way to assure that the Convention would obey.”

Supreme Court Justice Antonin Scalia agrees, saying recently, “I certainly would not want a constitutional convention. Whoa! Who knows what would come of it?”

We also can’t depend on the state ratification process for amendments to protect the Constitution from radical changes. A convention could create a different method of ratification, such as a national referendum. The convention that crafted the U. S. Constitution ignored the ratification procedures under which it was established and created entirely new procedures.

Balanced budget amendment would cause great damage to the economy and basic services Kentuckians rely on

While the danger to the U. S. Constitution from uncontrolled changes is reason enough to reject this proposal, the risk of serious damage to the economy and the services that Kentuckians depend on from a balanced budget amendment is another reason to say no.

A balanced budget amendment would make recessions longer and more damaging by requiring deep budget cuts or tax increases when the economy weakens in order to make revenues equal expenditures. When recessions hit, spending for programs like food stamps and unemployment insurance automatically goes up as more people become eligible at the same time tax revenues decline. That’s how these programs are intended to work, helping limit the depth of recessions and hasten economic recovery by injecting dollars into the economy when they are needed.

But under a balanced budget amendment, Congress would have to cut such programs, increase taxes or both in the midst of recessions, making downturns longer and more severe. And by keeping Social Security from being able to draw monies from its trust fund (built up from revenues in prior years) to pay benefits without an offsetting surplus in the rest of the federal budget the same year, it could mean serious cuts to that program.

Proponents use false analogies when arguing for a balanced budget amendment, suggesting that states and families must balance their budgets each year. States must balance their operating budgets, but they borrow every year in their capital budgets to build infrastructure. They also spend money out of rainy day funds when times are tight. And families’ spending doesn’t equal their income; they borrow regularly to buy homes and send their kids to college, and spend out of savings such as for the down payment on a home.

Protecting U. S. Constitution and the economy of Kentucky requires rejecting proposal

A resolution calling for a constitutional convention on this issue last moved in 2011 in Kentucky, when it passed the Senate 22-16 but did not advance in the House. At the time, Speaker Greg Stumbo called it an “untested, untried and a very dangerous path to go down” that his chamber would pass “when pigs fly.”

Whatever its chances in Kentucky this year, there is big corporate money behind the call for a convention, movement on the issue across the country the last few years and a small number of additional state resolutions needed to make a convention happen. The implications for the country and its founding document are frightening. The Kentucky General Assembly must reject this proposal.

Power+ Plan for Appalachian Renewal

Map Shows How HB 374’s State EITC Would Help Working Families and Communities Across Kentucky

By closing several corporate tax loopholes, House Bill 374 would enable the state to invest in an Earned Income Tax Credit (EITC) for Kentucky’s working families. The state EITC would be 7.5 percent of the federal EITC, and would build on the established benefits of the federal credit—helping more than 400,000 working Kentuckians better afford necessities and stimulating local economies.

The following interactive map describes the positive impact a state EITC could have on each Kentucky county. Scrolling over a county on the map shows the number and share of people who would benefit and the additional dollars that would flow into each community. To view a larger version of the map, click here.

Independent Study Says Medicaid Expansion a Good Deal for Kentucky’s Economy

In recent months, some have expressed concern that the cost of Kentucky’s Medicaid expansion may exceed its benefits—especially in light of greater than expected participation by low-income Kentuckians. However, a new independent report from Deloitte and the University of Louisville’s Urban Studies Institute shows that a net positive fiscal benefit to Kentucky is still anticipated because greater enrollment also means higher than projected job creation from more federal dollars flowing in to the state.

The report shows that a total of 310,000 Kentuckians enrolled in the Medicaid expansion in 2014 (compared to initial projections of 147,634), and the expansion is now estimated to have a positive cumulative impact of $30.1 billion on the state’s economy through 2021 (the original projection was $15.6 billion). The net cumulative impact on the budget is also positive over the first eight years—becoming only slightly negative in 2021 when the state’s share is fully phased in at $45 million net costs.

The $30.1 billion positive economic impact between 2014 and 2021 largely results from:

Increased Revenues for Healthcare Providers – There were $1.16 billion in new Medicaid revenues to healthcare providers just in 2014—with $506.6 million going to hospitals alone.

Job Growth – One of the most important impacts of the Medicaid expansion is the resulting growth in jobs. The report estimates that the expansion resulted in 12,000 new jobs in Kentucky in 2014 due to related spending—and 5,400 of them were healthcare sector jobs. Through 2021 more than 40,000 jobs are expected to be created, resulting in more than $1 billion in income, sales and occupational tax revenues over the next eight years.

Federal Funds Replacing Some General Fund Dollars – The Medicaid expansion has enabled General Fund budget reductions to several state agencies—Department for Public Health; Department for Behavioral Health, Developmental and Intellectual Disabilities; and Department of Corrections—because under expanded Medicaid some of the costs are covered by federal money. For instance, adults under 138 percent of the Federal Poverty Level can now receive medical treatment at local health departments through Medicaid rather than exclusively through General Fund dollars.

Reduction of State and Local Expenditures for Uncompensated Care – The Quality Care Charity Trust Fund (QCCT) at the University of Louisville Hospital has been in place—and funded by the state, local government and university—to cover the medical expenses of those who cannot afford to pay for their care. Budgeted contributions to the QCCT are now being reduced because of the Medicaid expansion’s coverage of more low-income Kentuckians.

uncompensated care graph 2015

Source: Deloitte, “Commonwealth of Kentucky Medicaid Expansion Report 2014.”

Avoiding $99.5 Million Cost to the State of Not Expanding – The report makes the point that it would cost the state money not to expand, noting that “without Medicaid expansion, the state may not experience some of the near-term direct costs associated with the Medicaid expansion population, but the result of such a decision could be the forfeiture of the economic benefits associated with increased jobs and tax revenue.”

Of course, in addition to the Medicaid expansion’s direct economic payoff, expanded health coverage can be expected to improve the health of the population as well. However, the estimates in the report do not take into account the potential economic benefits of improved health through increased coverage.

Kentucky’s decision to expand Medicaid has played an important role in the state’s uninsurance rate dropping so substantially—according to Gallup, from 20.4 percent in 2013 to 11.9 percent in mid-2014, the second largest drop in the nation. In addition to the 310,000 Kentuckians enrolled in Medicaid in 2014 through the expansion, an additional 36,702 enrolled in Medicaid under the traditional (pre-expansion) qualification guidelines.

The report also shows that participants in Kentucky’s Medicaid expansion are seeking out preventive care, which will likely positively impact health outcomes. For instance, in 2014:

  • 232,000 members had a non-annual physician office visit;
  • 90,000 members received cholesterol screening;
  • 80,000 members received preventive dental services;
  • 46,000 members participated in diabetes screening;
  • 34,000 members had cervical cancer screening;
  • 26,000 members had breast cancer screening.

And the report indicates that the Medicaid expansion is providing better access to substance abuse treatment in our state. A least 13,000 people with a substance use disorder diagnosis have received treatment services, and more than 300 new behavioral health providers have enrolled in Medicaid.

The new study of the state’s Medicaid expansion more than confirms that it was a smart move for Kentucky. The analysis overwhelmingly shows that the expansion is proving to be good for the state’s economy as well as the health of its citizens.