This General Assembly, like prior ones, includes a slew of bills that would create new or expand existing tax breaks for a wide variety of people, businesses and activities. While most such bills typically fail to pass, some usually do each session — diminishing the revenue Kentucky has to invest in schools, healthcare, infrastructure and other needs. As of the bill filing deadline last week, legislators had introduced about 40 tax break bills.
Though there are rare exceptions, state tax breaks are often ineffective strategies to achieve particular policy goals. They typically provide only modest incentives that have little effect on behavior compared to other factors and can provide windfalls to businesses or people for actions they would take anyway. Some are simply tax cuts for particular groups or interests. Tax breaks are almost never revisited or evaluated and spending for them comes off the top before any money is appropriated for schools, healthcare, pension liabilities and other budgetary needs.
Here’s a list of the tax break bills introduced and an indication of the cost on full implementation, if available. For those described as refundable, the person or business benefitting will receive a payment if the break exceeds their tax liability. Some can also be “carried forward,” meaning if the full amount of a credit exceeds tax liability in one year, the credit can be applied to reduce tax liability in future years.
- HB 15: Provides a $1,000 refundable income tax credit for volunteer firefighters ($13.2 million).
- HB 21 and HB 44: Provides sales, individual income tax, corporate income tax and limited liability entity tax credits for companies located in the promise zone in eastern Kentucky.
- HB 37: Exempts unmined coal reserves from state and local property taxes ($278,000 state and $2.9 million local).
- HB 51: Reduces motor vehicle property tax rates by 50 percent for certain disabled veterans ($292,000 state and $752,000 local).
- HB 59 and HB 102: Constitutional amendment increasing the property tax homestead exemption for disabled veterans.
- HB 64: Provides a refundable income tax credit for cost of homeowners to mitigate airport noise ($3 million).
- HB 117: Creates a $1,000 income tax credit for hiring unemployed coal industry workers ($5.1 million).
- HB 124: Expands the film tax credit to allow enhanced incentives in five counties (Boyd, Clark, Hart, Madison and Rowan).
- HB 165: Creates a tax credit for the purchase of coal for electricity and industrial processes ($478,000).
- HB 182 and HB 399: Creates a tax credit against insurance and bank franchise taxes for contributions to a fund for investment in rural businesses.
- HB 203: Eliminates the annual cap on the use of angel investor tax credits ($6 million).
- HB 212: Exempts charitable auction receipts from the sales tax.
- HB 214: Increases the refundable income tax credit for donating food to nonprofit food programs from 10 percent to 20 percent.
- HB 216: Excludes from the income tax up to $4,000 in annual contributions for 529 college savings accounts.
- HB 295: Allows an income tax credit for adoption expenses in the amount of 20 percent of the allowable federal credit.
- HB 302: Exempts from sales tax 35% of gross receipts from sale of utilities to restaurants.
- HB 330: Extends the time limit on the tax increment financing district in Louisville from 20 years to 45 years.
- HB 339: Provides a 20 percent refundable tax credit to restaurants for food donations.
- HB 340: Creates a 40 percent nonrefundable income tax credit for donations of land for conservation.
- HB 355: Creates a credit against income taxes for affordable housing development in an amount equal to 50 percent of the federal low income housing tax credit or $5,250,000.
- HB 362: Increases the maximum reimbursement allowed from collecting and remitting sales tax from $50 to $1,500.
- HB 368: Provide a sales tax credit targeted for the new Amazon facility in northern Kentucky for purchase of jet fuel in excess of $1 million a year.
- HB 382: Allows employer contributions to an employee’s student loan debt of up to $5,250 per year to be excluded from the employee’s individual income taxes.
- HB 388: Expands the definition of projects for tax increment financing.
- HB 405: Entirely exempts military pension income from the income tax.
- HB 424: Excludes from the income tax wages from employees working in the eastern Kentucky promise zone and allows employers to keep 75 percent of sales tax otherwise due.
- HB 436: Excludes contributions of up to $10,000 per return to a 529 college savings account or disabilities-related expense account from the individual income tax.
- HB 445: Exempts charitable gaming supplies and equipment from the sales tax.
- HB 457: Expands the Kentucky Business Investment tax break program to include private infrastructure investment.
- HB 518: Creates an income tax credit for investments in abandoned buildings.
- SB 41: Exempts sales of bullion and currency from the sales tax ($745,000).
- SB 93 and HB 248: Provides a nonrefundable income tax credit of $500 for physicians who teach and supervise medical students ($950,000 – $1,000,000).
- SB 102 and HB 162: Provide a nonrefundable tax credit of 90 percent or $1 million for contributions made for scholarships to attend private schools against individual income tax, corporate income tax, limited liability entity tax and bank franchise tax ($25 million to rise to $76.25 million by 2024).
Kentucky already spends more on tax breaks than on direct investments in our communities, as the graph below shows. Instead of adding a plethora of new breaks, we should be scrutinizing the ones we already have and cleaning up the tax code. That way, we can generate a more sustainable flow of revenue for effective public investments that have been cut in recent years.
It is unclear whether any of the tax break bills proposed this year will get signed into law this session. The governor actually vetoed a tax break bill the legislature passed last year. But a big question for tax reform, which the governor says he wants to tackle in a special session this year, is whether legislators will avoid the temptation to create even more tax breaks such as the ones they are now filing – some of which have powerful special interests backing them.
by Tom Loftus
The theory behind performance based funding for higher education in Kentucky is that tying some funding for the state’s public universities and community colleges to outcomes could incentivize the institutions to graduate more students. While it is a relatively simple concept, the details of the performance funding bill Senate Bill 153 are more complicated. Here are some of the key questions and answers on the topic.
Where does the funding come from?
While performance funding is often tied to new money, in this case it is not. In 2018, the formula described in SB 153 would apply to five percent of state funding that would otherwise have gone to the state’s public universities. After 2018, all state institutional funding (other than for mandated programs and debt service on bonds) would be distributed through the formula. It is important to note not only is there no new money tied to performance funding in Kentucky at this point, the public higher educational institutions are already stretched very thin from previous rounds of state budget cuts — including a 4.5 percent cut in 2017.
SB 153 describes a proposal for distributing most state money for the public universities and community colleges (not including for mandated programs and debt service on bonds) through two different funding models — one for the universities and one for the community colleges system. In these models, 35 percent of the funding is explicitly connected to performance outcomes and another 35 percent is based on credit hours earned — which can also be seen as related to performance. The other 30 percent is tied to basic operational costs.
Who was consulted about what is in the bill?
SB 153 is based on recommendations made by a Performance Funding Work Group established through the state budget bill for 2017 and 2018. Work group members were: the university and community college presidents, the president of the Council on Postsecondary Education (CPE), two legislators, a representative of the governor’s office and the state budget director. The work group began meeting over the summer and agreed on recommendations in late November that were submitted in a report to the administration. The bill is generally based on this report, but many of the details are not in the bill. The bill would make CPE responsible for developing the specific administrative regulations for the funding model, which would assumedly be based on the work group report.
Would institutions be competing against each other? Or against individualized goals for each institution?
The universities would be in competition with each other based on a three-year average of their outcomes on various metrics. However, there are limits placed on how much funding can drop for institutions from year to year in the first several years of the model. The two research universities are expected to receive larger shares of the funding (with heavier weights on each performance metric) as outlined in the work group report, due to the greater cost of producing advanced degrees at these institutions; however, these details are not included in the bill. The model also makes a funding adjustment to reduce the disadvantage for smaller schools that would otherwise be present in the model. Kentucky State University is exempt from the funding model in the first year.
The 16 community colleges in the Kentucky Community and Technical College system would similarly be competing against each other for shares of the funding.
How is performance measured in the proposal?
The four-year universities and the community colleges have different funding models and pools in the proposal, as described below.
It may seem surprising that some of the metrics in the funding model are not actually based on performance — for instance, a share of funding is based on the square footage of campus buildings. This has to do with the somewhat broader charge of the performance funding work group laid out in the budget bill: “The working group shall be established for the purpose of developing a comprehensive funding model for the allocation of state General Fund appropriations for institutional operations.” In the past, funding for the state’s public postsecondary institutions has been somewhat arbitrarily based on how much each institution received in the past rather than in a more systematic way. As noted previously, while 35 percent of the funding model is explicitly tied to student success outcomes, the other 65 percent has less to do with performance per say — although 35 percent is based on credit hours earned, which is related to performance.
Funding that would have gone directly to the public universities (although just 5 percent in 2018) would be divided up as follows:
- 35 percent is based on each institution’s share of student success outcomes produced, including: bachelor’s degree production; bachelor’s degrees awarded per 100 undergraduate full-time equivalent students; number of students progressing beyond 30, 60 and 90 credit hour thresholds; Science, Technology Engineering, Math and Health (STEM + H) bachelor’s degree production; and bachelor’s degrees earned by low-income and underrepresented minority students.
- 35 percent is divided up based on each institution’s share of total student credit hours earned at all the public universities, with greater weight given to upper division undergraduate as well as graduate courses.
- 30 percent is divided up based on the share of measures of operational support needs.
- 10 percent is based on each institution’s share of square footage for maintenance and operations.
- 10 percent is for institutional support based on share of direct instructional costs.
- 10 percent is for academic support services based on each institution’s full-time equivalent student enrollment.
- As mentioned previously, metrics are expected to be weighted more heavily for the University of Kentucky and the University of Louisville, although these details are not included in the bill, and the model includes a “small school adjustment” for funding to minimize negative impacts on smaller public four-year universities.
Kentucky Community and Technical College System (KCTCS)
The model for KCTCS colleges is similar, with 35 percent of all funding (in 2018 this is 5 percent of state funds that would have gone directly to KCTCS) being distributed based on the share of student success outcomes produced. However, the student success outcome metrics are different for KCTCS schools:
- Diploma, certificate and associate degree production.
- Number of students progressing beyond 15, 30 and 45 credit hour thresholds.
- Production of the following credentials: STEM+H; high-wage, high-demand industry credentials; and industry credentials designated as targeted industries by the Education and Workforce Development Cabinet.
- Credentials earned by low-income, underprepared and underrepresented minority students.
- Transfers to four-year institutions.
The other 65 percent of KCTCS’s portion of the performance fund is divided up in the following way: 35 percent is based on the share of total student credit hours earned at KCTCS (weighted according to cost differences by academic discipline) and 30 percent is divided up based on the cost for maintenance and operation of facilities, institutional support and academic support.
The KCTCS model may include an “equity adjustment” for funding to account for declining enrollment in some regions of the state.
Click here to read about how the performance funding proposal could impact low-income, minority and academically underprepared students.
How Would the Performance Funding Proposal Impact Low-Income, Minority and Academically Underprepared Students?
We have previously written about how while a performance model could potentially promote success for all Kentucky students, depending on how it is designed, it could instead result in unintended consequences that have a negative impact on low-income, minority, adult and academically underprepared students. The specific funding model proposed in Senate Bill 153 could do more to prevent these unintended outcomes.
Heavily Weighting Metrics for Low-income and Minority Students
A concern is public universities may be incentivized to restrict admissions to only the most academically prepared students in order to increase performance on metrics in the funding model. Such practices reduce access to higher education for low-income and minority students.
Recent research found restrictions in student admissions reported under performance funding in Indiana, Ohio and Tennessee. Another study found schools subject to performance funding receive less Pell Grant revenue than colleges that do not, suggesting there are potentially strategic behaviors at institutions under performance funding to recruit students from higher-income families. In addition, examples of Historically Black Colleges and Universities (HBCUs) struggling under performance funding are concerning. In response to the introduction of a performance funding system in Florida, FAMU (Florida Agricultural and Mechanical University) the state’s historically black public university, began limiting the number of students admitted conditionally because they did not meet minimum admissions criteria. Historically students who would not be eligible for admission into larger four-year institutions have been able to find a place at HBCUs like FAMU that help bring these students academically up to speed. While at the height of FAMU’s enrollment almost 80 percent were these Access and Opportunity students, in 2015 just 28 percent were.
One way of preventing this unintended consequence is to heavily weight student success outcomes for low-income, underrepresented minority and academically underprepared students. While the proposed model does indicate specific metrics for degree attainment for low-income and minority students, the bill does not specify what shares of the funding they will be — and those described in the Performance Funding Work Group report were quite low.
Another way to address these unintended consequences is to incentivize institutions to serve low-income and minority students in the first place — for instance, by tying some funding specifically to enrolling these students and/or at least weighting course completion more heavily for them. It is more costly to educate and graduate academically underprepared students and the model does not take these additional costs into account.
Building in More Mission Differentiation
A related unintended consequence is the narrowing of institutional missions, where important aspects of mission are dropped or deemphasized because they are not addressed by performance funding metrics.
Such a consequence should be of concern to our state as Kentucky’s Postsecondary Education Improvement Act of 1997 established separate missions for its research universities, regional universities and community colleges. These differing missions would seem to require different measures of performance, but the model has the regional institutions competing in the same performance pool as the research universities and on the same metrics. As noted in a recent article on the negative impacts of performance funding on HBCUs, often under performance funding models “schools do not receive credit for the work of raising up at-risk and under-resourced students; but they get all of the punishment for enrolling students who do not persist and complete due to lack of readiness or lack of funds.”
The mission of the state’s regional universities, to assure statewide access to quality bachelor’s and master’s degrees, involves serving large shares of low-income and academically underprepared students. It would clearly be detrimental if the state adopted a model that reduced access to education for some Kentuckians currently served by these schools by incentivizing these institutions to become more selective or resulting in inadequate funds. The model could also end up putting pressure particularly on the smaller institutions like Morehead State University, that are the most disadvantaged in the model, to raise tuition more than they would have otherwise, which would also reduce access. College affordability is already a barrier for too many students in our state.
Strengthening Evaluation and Addressing Funding Adequacy
The funding model includes an evaluation of its implementation every three years in order to determine if any unintended consequences are occurring and make needed adjustments, which is an important positive aspect of the proposal. However, it would be strengthened by including more details about what the evaluation would involve, what exactly would be measured and what actions should be taken. Transparency should also be built into that process and individuals/groups explicitly representing student and citizen interests should be added to the involved work group outlined in the bill.
In addition, increasing outcomes especially for academically underprepared students requires adequate institutional resources, which is a challenge after so many rounds of state budget cuts to higher education. This context of underfunding makes implementation of the model difficult and could make unintended consequences more likely.
Repeal of the Affordable Care Act (ACA) means going back in time to before the law existed or to some as yet undefined “replacement” plan. Some in favor of repeal suggest a new plan should contain what are called high risk pools, including in the recent “Obamacare Repeal and Replace” policy brief circulated by Republican lawmakers in Washington. But evidence from Kentucky’s former high risk pool called Kentucky Access shows how such ideas fall short of the protections and coverage in the ACA.
What is a High Risk Pool?
Kentucky Access and other high risk pools across the country were created pre-ACA as a way to try assisting some people with serious conditions that made them too expensive to insure. States decided to “pool” people who couldn’t otherwise access coverage into their own insurance group and provide public funds to cover any cost of care above what member premiums paid for. In theory this made insurance cheaper for healthy people and gave people with preexisting conditions a chance at getting insurance coverage.
How did it work in Kentucky?
Kentucky operated its high risk pool Kentucky Access from 2001 until 2013 when it was no longer needed thanks to provisions in the ACA. Applicants had to meet one of two criteria to participate in Kentucky Access:
- Being “medically uninsurable,” meaning two insurance companies had already declined to cover him or her based on a preexisting medical condition, or they were quoted premiums more expensive than what Kentucky Access was offering. This eligibility group made up the vast majority of members.
- If a person lost coverage after switching jobs or getting laid off, they would be eligible for membership in Kentucky Access because of the Health Insurance Portability & Accountability Act (HIPAA) of 1996.
This pool was paid for by premiums from members, state tobacco settlement funds and the Guaranteed Acceptance Program (GAP) assessment, which is a fee charged to insurance policies as well as to financial protection products (called stop-loss insurance or reinsurance) purchased by insurance companies. Whereas most other insurance pools’ premiums are enough to cover the cost of its members’ health care, those in high risk pools had conditions so expensive that in order to cover them, revenue beyond premiums was needed.
Source: 2004-2013 Kentucky State Auditor reports for Kentucky Access.
The original idea was people who would otherwise have been denied coverage could pay premiums with a cost capped at 75 percent above the price of comparable private plans. In 2001, annual premiums for Kentucky Access ranged from $1,798 to $11,056 and were meant to make up a small portion of the cost of the program. What happened over time, however, was the average premium rose 22 percent when adjusted for medical inflation between 2004 and 2013, and comprised over half of the total revenue for Kentucky Access by 2012.
Source: 2004-2013 Kentucky State Auditor reports for Kentucky Access, enrollment data from the Cabinet for Health and Family Services, & BLS medical inflation data.
Enrollment in Kentucky Access grew steadily up until 2010, when the ACA created a national high risk pool as a temporary measure before Medicaid expansion and the health insurance marketplaces went into effect. The national high risk pool operated from 2010-2014.
Source: enrollment data from the Cabinet for Health and Family Services.
Coverage was expensive for Kentuckians and covered few people
If the goal was to offer a form of coverage to people who wouldn’t have otherwise been insurable, Kentucky Access worked for a few thousand people. According to the Commonwealth Fund, the coverage it offered was also similar to private plans available to the rest of the public:
However, premiums could cost up to 75 percent more than the average comparable plans, making them out of reach for many low-income Kentuckians. Also, Kentucky’s high risk pool didn’t cover treatment for the conditions that made its members ineligible for private coverage in the first place until they had been enrolled for a full year. This meant that members were on their own dime for treatment to address their preexisting conditions until 12 months after their initial enrollment. Obviously, this was a financial hardship that could contribute to worsened health conditions. Finally, there was a $2 million lifetime cap placed on enrollees. When it comes to expensive, chronic conditions, such caps can leave people right back where they started – uninsured and uninsurable.
ACA covers many more people and gives access to prevent and manage expensive conditions
Expanding Medicaid to cover more low-income people, offering premium subsidies to others and requiring individuals to have insurance or else face a penalty all eliminated the need for Kentucky Access. Instead, with the ACA, people got insurance coverage to a historic degree, immediately becoming eligible for the treatment of conditions that would have made them uninsurable before.
The ACA also contains a popular provision that requires insurers to offer insurance to everyone, regardless of whether or not he or she has a preexisting condition, known as “guaranteed issue.” One estimate puts the number of Kentuckians with a preexisting condition protected by the guaranteed issue provision at 1.9 million, which far exceeds the 4,700 people covered through Kentucky Access at its peak.
The ACA not only covered more people, but also required insurers to offer free preventative services. This measure is helping prevent ailments from worsening over time, and in some cases preventing them from becoming chronic. This saves money over the long run. So while there was an initial jump in costs for insurers as people started utilizing their coverage for conditions that had not been treated adequately, over time shocks like that won’t be as large.
High risk pools a huge step backward in coverage and prevention
When the health insurance market relied solely on premiums to pay out benefits, insurers were unwilling to cover people who required costly care. But under the ACA, since everyone is required to get health insurance (particularly young and healthy people) insurance pools can once again balance the costs across enrollees. Further, expanding Medicaid and subsidizing insurance for low-income Kentuckians, many of whom had not been insured for years prior, helps people get and stay healthy, lessening the population’s need for costly care over time.
Some of the proposals to “replace” the Affordable Care Act include high risk pools as one component. However, experience has shown that Kentucky Access was expensive and offered insufficient coverage to very few people compared to how the ACA currently operates. Segregating people who need care the most into inadequate insurance plans is not an acceptable alternative to the many ways Kentucky benefits from the ACA.
Anecdotal claims are often made that many good jobs are available across the state but Kentucky lacks a workforce skilled and responsible enough to fill those jobs. But the fact is our economy is comprised of many jobs that offer low wages and have few skill requirements — jobs that Kentuckians are working every day.
The Education and Workforce Development Cabinet released its updated occupational outlook report for the years 2014 to 2024 last summer, and recently created a new interactive tool to share related data. Rather than lots of high-skill, high-wage jobs, these reports show the majority of available employment is in relatively low wage, low skill occupations.
According to the outlook report, 66 percent of jobs in Kentucky required only a high school diploma or less in 2014. By 2024, the share is expected to be 64.6 percent, only a slight decline from 10 years earlier.
Most of the specific occupations with the greatest anticipated number of openings over the next 10 years also have low skill requirements and pay low wages. As shown in the table below, 8 of the 10 most common occupations pay less than $15 an hour on average, and 3 pay less than $10 an hour. Of these top jobs, only two require an associate’s degree or higher (registered nurses and general/operations managers).
Source: Education and Workforce Development, Kentucky Occupational Outlook to 2024.
This data is in line with other information suggesting 30 percent of Kentuckians are in jobs that pay less than $12 an hour. In contrast, a family of 3 in rural Kentucky needs about $24 an hour in full-time, year-round work to meet basic family needs.
The outlook report also notes greater educational attainment is generally associated with higher wages, an idea that is widely understood. The best choice for an individual remains getting more education and training. However, for the workforce as a whole, the vast majority of jobs remain in occupations that do not require such training. While more can be done to improve the extent to which employers utilize workers’ skills in those jobs, there is also a need for strategies besides education to lift job quality.
Examples of policies that can make jobs better (and thereby inject more money into our local economies) include a substantial increase in the minimum wage, including for tipped workers; an expansion of income supports like the Earned Income Tax Credit and the protection of Medicaid expansion, which provides many low wage workers with health insurance. We should also be making it easier, not harder, for service sector workers to bargain for better wages.
Anecdotal claims about the quality of our workforce are often used to undercut such policy improvements. If the jobs out there are great, but the people are lacking, it is easy to put the blame on the workers. But the data challenges the dominant myths about Kentucky’s workers and the jobs available in our economy. Kentuckians are showing up to work every day in low wage jobs at restaurants, retail stores, nursing homes and more. Many face challenges at such jobs with irregular scheduling, wage theft and lack of access to sick leave in addition to low pay and little respect—even while CEO pay soars and corporate profits are at record highs.
We need an agenda much more focused on improving the quality of jobs that Kentuckians have today, an agenda based on facts and not myths.
by Greg Stotelmyer
by Jamie Williams