Senate Health Care Repeal Bill a Drastic Step Backward for Kentucky’s Health

The Senate released the discussion draft of their bill yesterday to repeal the Affordable Care Act (ACA). If passed, the Senate proposal would be a terrible setback for the 1.4 million Kentuckians covered by Medicaid as well as all Kentuckians who benefit from the patient protections and assistance buying coverage contained in the ACA.

Nationally, the Congressional Budget Office (CBO) estimates that it would end coverage for 22 million Americans and drive up health care costs for nearly everyone else.

Effectively Ends Medicaid Expansion

Over 473,000 low-income Kentuckians have gained Medicaid coverage because the state chose to expand eligibility through the ACA – a choice that resulted in more low-income people getting access to care and on a path toward better health, as well as improvements in Kentucky’s economy. The Senate bill would eliminate Medicaid expansion through a three-year phase-out of extra federal funding for expansion-eligible enrollees starting in 2021. While the House ACA repeal bill only applied the lower federal funding rate for new enrollees, the Senate phase-out would apply the lower match rate to current and new enrollees. One estimate indicates Kentucky would have to pay $853.8 million more a year in 2024 to maintain coverage for this group of low-income Kentuckians. States have always had the option of covering people who have a higher income than what the traditional Medicaid program allows, but very few states chose to pay the extra cost to do so in the past.

Squeezes Funding for Traditional Medicaid Even More

One of the most damaging parts of the Senate bill has nothing to do with the ACA at all, but would change the way the original Medicaid program was structured over 50 years ago. Under the Senate plan, the federal government would pay a set amount per enrollee, called a per capita cap, rather than simply pay a share of all Medicaid health care costs. That amount would then be increased at the same pace as general inflation (starting in 2025), known as the consumer price index (CPI). CPI grows more slowly than the cost of medical inflation, private insurance per-enrollee or Medicaid coverage per-enrollee (most importantly) as seen below. The end result is Kentucky will have less and less funding to pay for the care of the children, pregnant women, seniors and people with disabilities who rely on Medicaid coverage.

Additionally, the bill no longer requires states to provide the 10 Essential Health Benefits for Medicaid enrollees. These benefits include a basic set of services like hospitalization, lab work, preventive care, behavioral health care, addiction treatment and prescription drugs. The bill then further erodes Medicaid coverage by writing into law the option for states to require work from those covered by Medicaid, a radical change that has never been allowed before. It also gives states the option to receive funding through a block grant, which makes it even less responsive to a state’s health care needs. States would then be able to alter their programs much more than has ever been allowed and severely limit coverage for vulnerable and low-income people.

Combined, the senate bill cuts $772 billion from expanded and traditional Medicaid over ten years, with those cuts accelerating in the tenth year.

A prior estimate based on the House version of repeal said, combined with the cuts to the expansion, a total of $16 billion in cost would be shifted to the Kentucky state budget over 10 years. With such a large funding gap, lawmakers in Frankfort would almost certainly end Medicaid expansion and scale back traditional Medicaid. This would leave as many as 535,600 previously covered Kentuckians without Medicaid coverage according to an estimate based on the House bill. The CBO predicts that of the 22 million losing coverage, 15 million would be people no longer covered by Medicaid.

Rolls Back Premium Assistance for People Purchasing Insurance on the Exchanges

The Senate bill keeps the basic structure of the ACA marketplace subsidies, but dramatically scales back the financial help older and low-income Kentuckians would receive for purchasing insurance. At the same time, it increases what older people can be charged for insurance from three times more than younger people under the ACA to five times more. For a 60 year old in Kentucky with an income at 300 percent of the Federal Poverty Level, that means premiums after tax credits for the same coverage they have now would be an estimated $4,281 a year higher.

Additionally, the bill cuts off income eligibility for help paying premiums at 350 percent of the Federal Poverty Level (FPL), or $42,280 for an individual, rather than 400 percent FPL under the ACA. In Kentucky, there are more than 32,000 people who are in this income range, under 65 years old and didn’t get coverage from work or other government programs like Medicare or military coverage. A 60 year old Kentuckian with income just above 350 percent of poverty would lose an estimated $5,110 a year in assistance buying insurance.

Will Result in Out-of-Pocket Health Care Costs Soaring

At the same time premiums rise under the Senate bill, out-of-pocket health care costs like deductibles, co-pays and co-insurance will rise too. First, the Cost Sharing Reductions (CSRs) that help reduce out of pocket health care spending for marketplace enrollees will be paid through 2019, but will end after that. This means the 41,209 Kentuckians receiving CSRs will have to pay more up-front for care starting in 2020.

The other cost increase comes from lowering the share of health costs an insurance company must pay for an enrollee’s care. Right now, a silver plan on the health insurance marketplace – which the government considers the average plan that provides adequate benefits – covers 70 percent of costs. The Senate plan lowers that standard to 58 percent, which would increase out of pocket spending by 40 percent on average for those plans.

Guts Patient Protections

The Senate bill rolls back patient protections in several ways. First, the bill requires states to set the limit on how much profit an insurance company can keep relative to what they pay in claims starting in 2019. It is this cap that protects people in counties with only one insurer from the effects of a monopoly since the companies can’t run up their profit margins. In fact, since this limit was put in place, insurance companies have refunded Kentucky insurance customers over $33 million. It is likely that when this control is handed back to the states that there will be pressure on lawmakers to allow insurance companies to charge more in premiums so they can pocket more in profits– which the CBO expects to happen under the proposed legislation.

Another protection set in place to ensure lower premiums for quality insurance are the individual and employer mandates in favor of a 6-month lockout period for people who don’t maintain continuous coverage. It is through the requirement that everyone have health coverage that insurance companies can offer policies to less healthy Kentuckians at the same rate as healthy ones. By repealing this provision and threatening a lockout for people with coverage gaps, it is possible that healthy people will take the risk of going without coverage, which will force insurers to increase premiums for everyone else or decide not to participate. in fact, the CBO estimates that the primary reason for the initial drop in coverage is healthy people will choose to go without insurance, even under a lockout provision. An insurer in Pennsylvania recently stated that if the government did not enforce an individual mandate then their premiums would be 14.5 percentage points higher. The risk of an insurance “death spiral” is very high with this provision of the Senate bill.

The bill also makes significant changes to the 1332 State Innovation Waivers to allow states to opt-out of several patient protections. While it is not immediately clear what all the implications of this change would be, it appears that the waivers would be broadened so states could choose not to require the Essential Health Benefits or to no longer ban annual or lifetime spending caps. It also allows states to make changes that could reduce the number of people covered or the level of benefits offered, which they are not allowed to do under current law. If states can waive requirements that plans cover Essential Heath Benefits, people with pre-existing conditions in the individual market will have difficulty finding affordable plans that cover care for their conditions. The CBO expects about half of the population to live in states that request such waivers, though the details of each state’s changes would differ widely.

Cuts Low-Income Health Care to Pay for Tax Breaks for the Wealthy

The billions cut from Medicaid and insurance subsidies are used to pay for $541 billion in tax breaks, which will almost exclusively benefit the wealthy. According to one estimate, 91 percent of the tax cuts in the House version of the bill  would benefit the top 1 percent of earners in Kentucky, who would receive an average tax break of $11,060. Only 29,406 Kentuckians would see any tax cut at all.

Kentucky’s rate of uninsured has dropped by 55 percent since 2014. Since then newly insured Medicaid enrollees have gotten needed care, hospitals have seen their uncompensated care plummet and our economy has seen a boom of health care jobs. Sick, old and low-income Kentuckians who were once uninsurable or could not afford insurance have been able to get care without fear of seeing coverage cut off when it is needed most or facing bankruptcy from unpayable medical bills. The changes outlined in the Senate bill would be devastating and take our health care system even further back than before the ACA.

Updated June 27, 2017.

Kentucky Senators Take Leading Roles In High-Stakes Healthcare Debate

Statement on Senate Health Repeal Bill

Statement by Executive Director Jason Bailey on Senate health repeal bill:

“The Senate promised to start over on health care, but the bill introduced today doubles down on the disastrous ideas contained in the House’s American Health Care Act. At its core, the bill takes health coverage away from millions of Americans in order to provide enormous tax cuts to the wealthy. The Senate bill would worsen the House bill’s devastating cuts to Medicaid — which covers one in three Kentuckians — jeopardizing coverage for even more low-income people, kids, people with disabilities and seniors.

No state has more to lose from this bill than Kentucky because no state has achieved more in the last few years thanks to the Affordable Care Act. The bill would reduce Kentuckians’ health, harm the state’s most vulnerable and set us further back on fighting Kentucky’s opioid crisis. It will result in less coverage at higher cost, especially for poorer, older and sicker people. It will also lead to substantial job loss at hospitals and doctors’ offices and weaken Kentucky’s rural economies in particular.

Health coverage and care are essential to building thriving communities across the commonwealth. It’s now clear the Senate bill is a massive threat to that goal.”

 

Medicaid Cuts Would Harm Kentucky’s Kids

The American Health Care Act (AHCA) makes massive cuts to Medicaid, which currently covers 537,736 Kentucky children – 42 percent of kids in the commonwealth when combined with the Kentucky Children’s Health Insurance Program. Medicaid is a vital source of health care for children that provides both immediate care and long-term benefits.

Medicaid Works for Kentucky’s Kids

Medicaid has always been used as a tool for providing care to kids from low-income families. In Kentucky, a kid’s family income level and his or her age determines whether he or she can get coverage:

  • Ages 0-1: 200 percent of the federal poverty level (FPL) or $49,200 for a family of 4.
  • Ages 1-5: 142 percent of FPL or $34,932 for a family of 4.
  • Ages 6-18: 138 percent of FPL or 32,718 for a family of 4.

The eligibility threshold for adults is 138 percent of FPL, so the more generous threshold for young children means more kids can get health care early in life. In fact, in Kentucky Medicaid pays for:

  • 46 percent of births.
  • Coverage for 48 percent of infants, toddlers & pre-school aged children.
  • Coverage for 56 percent of children with physical, intellectual and developmental disabilities
  • Coverage for 81 percent of children living at or near the poverty line.

Thanks to Medicaid and the Kentucky Children’s Health Insurance Program (KCHIP), which commonly supplements Medicaid and employer coverage but also can stand alone as coverage for children up to 218 percent of FPL, the percent of uninsured children is lower than the rest of the population – 4 percent versus 6 percent respectively. The uninsured rate for children in Kentucky is now lower than it has ever been.

This high rate of coverage means that kids are getting care, which is especially important at a young age when conditions that could worsen down the road can be caught early and treated more easily. Medicaid coverage for kids includes a suite of benefits known as Early and Periodic Screening, Diagnostic and Treatment (EPSDT) enacted in 1967 that consists of developmentally-appropriate care. Through EPSDT, physical, mental, social and emotional assessments are regularly provided as well as necessary treatments for the conditions those assessments may reveal. These services are critical for kids from low-income families who often report having poorer health, are at higher risk of having a developmental or behavioral delay and are more likely to develop a chronic condition.

Kids with Medicaid See Benefits into Adulthood

While Medicaid is effective at providing needed care to kids when they need it, research shows the effects are long-lasting. Kids who are covered by Medicaid are more academically successful in school, are healthier as adults and are more financially successful as adults than kids from a comparable background without Medicaid.

These same studies show that the rate of hospitalization for kids covered by Medicaid is lower, leading to lower government spending on health care. Also, because children covered by Medicaid grow to earn more than they would have otherwise, tax revenue and economic activity increase. When people are healthier and more financially secure, not only do individuals and families benefit, but entire communities and economies are better off.

The AHCA Medicaid Cuts will Hurt Kid’s Coverage

Kentucky kids are at risk of losing Medicaid coverage and an associated higher quality of life under the AHCA. The Medicaid per-capita-cap and the elimination of the Medicaid expansion would shift $16 billion in cost to Kentucky over ten years. In the tenth year, the per-capita cap would cut traditional Medicaid funding alone by 25 percent, squeezing Kentucky’s ability to provide coverage for people and children who need it.

Medicaid cuts will take coverage from kids.

An estimated 3 million children nationwide will lose coverage if the Medicaid cuts and the cuts to subsidies for families who buy insurance on the exchanges are passed. In total, the Urban Institute estimates Kentucky will see 535,400 Medicaid enrollees lose coverage. Some of these would be because the Medicaid expansion is eliminated under the bill, but many would come from the per-capita-cap, which would force state lawmakers to ration care and end coverage for traditional enrollees including, potentially, children. Furthermore, as parents covered by the Medicaid expansion lose coverage, their children could also lose coverage; research has shown that when parents are uninsured, their kids often go without insurance too, even if they qualify.

Another reason why so many children would lose coverage is that the Affordable Care Act (ACA) increased the minimum eligibility threshold for older children (6-18) from 100 percent of FPL to where it is today at 138 percent. Repealing that would affect 38,630 Kentucky kids in that income and age range and are covered by Medicaid, according to 2015 Census data.

In-home health care services for kids with disabilities will be rolled back.

While nursing home care is mandatory under Medicaid, in-home health care is limited and discretionary and administered under what are called Home and Community Based Services (HCBS) Waivers. Kentucky has several of these waivers – and already vast waiting lists for each – which help physically, intellectually and developmentally disabled Kentuckians, many of whom are children, get care and remain in their communities. With less Medicaid funding, optional services like these are likely to be scaled back even further or eliminated. Also, 89 percent of children with special health care needs are 6 years old or older, a group for whom the Medicaid income eligibility threshold will fall from 138 to 100 percent of FPL as already explained. If low-income families in this group also lose waiver access to in-home services as a consequence of Medicaid cuts, they’ll be left without care.

EPSDT services could be scaled back.

In addition to this financial squeeze, the AHCA would allow states to make EPSDT optional except for disabled children. In addition to reducing enrollment and cutting provider payments even more, Kentucky lawmakers charged with balancing the state budget will have the ability to slash benefits like EPSDT in order to make up the funding gap. That would save money short-term, but would also harm children immediately and in the long-run would almost certainly result in an increase in the number of Kentuckians with chronic conditions that are debilitating and expensive to treat.

Medicaid funding for Kentucky schools’ health programs could be eliminated.

Medicaid pays for $34.5 million worth of health services in Kentucky schools; of that, $20.8 million is from federal dollars. This money pays for supports for children with special needs under the Individuals with Disabilities in Education Act, health-monitoring services provided to Medicaid-eligible children in schools and school-based dental clinics. These are optional services that would likely be on the chopping block if a per-capita-cap is enacted and funding diminishes over time. Without this money, superintendents across the commonwealth would have to make choices about pulling funding from other areas of their budgets or scaling back vital health services.

The Senate is preparing to vote on cuts to Medicaid that are permanent and would grow over time. Also, funding for CHIP will soon be up for reauthorization and President Trump’s budget proposes a $5.8 billion cut to the program over ten years. These cuts are a dangerous prospect for Kentucky’s most vulnerable who count on Medicaid and KCHIP as their way to get needed care, especially kids. The investment we make in children’s health has very real returns for them and our communities as a whole; to pass the AHCA would be to divest in our children’s immediate health and future potential.

Kentucky Public Pensions Are Not Expensive — If You Fund Them

A special session this fall will likely include proposals to cut public pension benefits, and new employees are especially vulnerable because their plans can be changed easily under law. However, such cuts do nothing to reduce the existing unfunded pension liability — which is owed to retirees and current employees — and won’t save money over the long-term either. That’s because Kentucky’s pensions are already inexpensive to the state as long as they are properly funded on time.

Actuaries refer to the regular cost of a pension plan as the “normal cost.” The normal cost is the amount that must be contributed each year an employee works so enough dollars are available in the system when employees retire to pay benefits. The remainder of the required payments to a system each year are catch-up contributions to pay for past liabilities where the employer’s payments have fallen behind.

The graph below shows the normal costs as calculated by the pension systems’ actuaries for the state’s two biggest plans, the Kentucky Employees Retirement System (KERS) non-hazardous plan and teachers’ retirement plan. The normal cost for the KERS non-hazardous pension plan is only 9.25 percent of employee’s pay. Of that, the employee contributes the majority by putting in 5 percent, making the employer contribution only 4.25 percent of pay. For teachers, according to the system’s 2016 actuarial valuation, the normal cost is 14.94 percent of pay for new (non-university) members. Again, workers pay the bulk of the cost: employees contribute 9.11 percent and the employer chips in only 5.84 percent.

To put this in perspective, these numbers are similar to the normal cost of Social Security contributions made by and for every worker in the private sector (which state employees also receive but state teachers do not). And remember: on top of their Social Security contribution many private employers make 401k contributions similar in size to the employer contributions below for public pensions in Kentucky.

Normal costs are low in part because defined benefit pension plans are efficient and effective ways to provide a decent and predictable retirement. They especially make sense for governments as a tool to attract and retain skilled workers. As large, permanent employers, governments can build big investment pools that can earn high returns over long periods of time due to low administrative costs and the ability to access a broad set of investments at low fees. Nationally, employers ultimately pay only about 25 percent of the cost of public employees’ pension benefits, with the rest coming from the investment returns the system earns and employee contributions.

Along with defined benefit plans’ efficiency, normal costs are low because Kentucky’s pension benefits are modest. The average non-hazardous state employee receives a pension of only $20,633, and the average teacher receives only $37,368 (and as noted Kentucky teachers do not receive Social Security, which averages $16,320 a year). New workers’ retirements will be even more modest after benefit cuts in 2002 and 2008 for teachers and in 2008 and 2013 for state employees.

Kentucky has a moral and legal obligation to meet the pension promises made to current workers and retirees, and we cannot solve the problem of pension liabilities on the back of new employees either. Current pension contributions are high primarily because Kentucky hasn’t been making adequate contributions in the past, and since the dollars weren’t in the system to earn investment returns the state must now provide large catch-up payments. Further slicing benefits for new employees won’t help — and can even make state costs go up by increasing employee turnover and making it harder to attract and keep qualified workers.

Kentucky’s State Budget Unable to Compensate for Massive Cuts in Trump Budget

President Trump’s budget proposal dramatically shifts costs to states they will be unable to afford, as shown in reports released this week by the Center on Budget and Policy Priorities. At the national level the cuts mean states and localities would immediately need to come up with the equivalent of more than five percent of state General Fund budgets to maintain the programs the federal government is shedding. Because the proposed cuts grow over time, what states need to assume responsibility for will grow to the equivalent of 37 percent of state budgets in 2027.

Given Kentucky’s continuing budget difficulties, our state will be especially ill-equipped to make up for proposed cuts to critical federal programs in the President’s budget, programs that support low-income families with children, people with disabilities and seniors — resulting in more Kentuckians being driven into poverty.

The table below from one of the new CBPP papers shows the cumulative impact of these cost shifts at the national level, with cuts to entitlement programs (the budget proposes cuts to Medicaid, SNAP food assistance and Temporary Assistance for Needy Families and the elimination of the Social Services Block Grant) as well as non-defense discretionary programs such as workforce development funding.

Kentucky — along with more than half of states — is already struggling to close gaps between ongoing costs and flagging revenues in our own budget. We are in no position to replace the funding that would be lost in the Trump budget proposal. On top of round after round of state budget cuts since 2008, our state is currently facing a $113 million revenue shortfall and unbudgeted Department of Corrections expenses of around $35 million for this year. In addition, the state is working to increase funding for its struggling pension systems. While we expect a special session to be called in the coming months on tax reform, it is unclear whether a plan that would genuinely and sustainably raise revenue will be proposed or passed. And in addition to pensions, any new revenue is greatly needed to invest in critical areas like education and child protection that have already experienced harmful cuts in state funding. Kentucky’s state budget isn’t able to meet its existing needs, let alone take on the additional costs that would result from President Trump’s budget proposal.

To prevent cuts to SNAP food assistance, for instance, Kentucky would have to come up with an estimated $245 million for the proposed required state contribution of 25 percent in 2023 and each year beyond; the total federal cut to SNAP in Kentucky in the budget over the next 10 years is estimated to be $1.7 billion. As noted in the new CBPP paper on the cost shift in SNAP, if the state wasn’t able to come up with the required portion it would have to cut benefits. For instance, if Kentucky couldn’t come up with any of the estimated $245 million in 2023, benefits would fall by about $60 a month per person on average. Currently the average SNAP benefit per month for each household member in Kentucky is only $123.

According to the paper, the impact of these cuts include:

  • SNAP benefits would no longer support the minimal cost of a healthy diet (and research suggests benefits may already be inadequate).
  • Geographic disparities in food insecurity and poverty would increase as some states would be better able to compensate for cuts than others.
  • Increased food insecurity would drive up other government costs such as health care costs related to inadequate and poor nutrition.
  • SNAP would no longer be able to respond effectively to recessions.

While SNAP food assistance cuts in the President’s budget are particularly large, low-income Kentuckians would also be hit at the same time by deep cuts to other critical poverty-reducing programs and low-income supports including Medicaid.

In President Trump’s budget proposal, state grants for workforce development activities for youth, adults and dislocated workers in Kentucky — through the Workforce Innovation and Opportunity Act (WIOA) — would be cut by 40 percent (a $16.3 million cut to Kentucky) in 2018. In addition, Employment Service (Wagner-Peyser) state grants would be cut by 38 percent ($3.2 million).

The table below details what it would cost our state to continue services funded by several federal programs completely eliminated in the Trump budget in 2018:

As a result of the Trump budget’s cuts and the state’s inability to take on these new costs, low-income Kentuckians would simultaneously be more likely to go hungry and less likely to have health coverage, housing and access to job training, among other services that help meet basic needs. Cuts to these federal programs, which help to alleviate poverty and enable economic mobility, would be especially costly in the long term as they could lead to declines in health, educational achievement and employment in Kentucky.

Kentucky Tonight: The American Health Care Act

TIF Creep Means Growing Costs, Less Accountability

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Tax increment financing (TIF) is a common method for financing economic development that uses increased tax revenues after property is redeveloped to help pay for the costs of development.  Kentucky started using TIF as a means to finance projects in 2000, with a menu of incentives that are much more generous than those offered in other states. Since 2000, the legislature has amended Kentucky’s TIF laws numerous times to relax standards, decrease accountability and make benefits more generous.

This continuing “creep” of the TIF program is concerning because the fiscal impact is growing quickly and there is little evidence the incentives actually result in increased economic activity that justifies the diversion of tax dollars from important funding priorities like education, public safety and other public goods we all benefit from.

A Brief History of TIF

TIF was first used many years ago in California as a way to encourage the development of blighted or abandoned property with significant and costly infrastructure needs, primarily in urban areas. The claim behind TIF is that by helping local governments and developers pay for the public infrastructure improvements associated with a project, a barrier that would otherwise prevent the development of the property is removed, and the entire community benefits from the improvements. Today, local governments in every state except Arizona use TIF in some form.

The most common use of TIF provides all or a portion of the additional property taxes generated by the increase in the value of the property because of the development to the developer for several years after the project is completed. The “increment” is the difference between old revenues (property taxes paid within the footprint of the property before the development) and new revenues (property taxes paid within the footprint of the property when the development is complete). The developer uses these payments to help satisfy debt issued to pay for the project. During this period, the local government continues to receive the portion of the property taxes attributable to the original assessed value of the property. In most states, TIF is a development tool used exclusively by local governments, and the only taxes that can be pledged are property taxes, or in some cases, sales taxes.

The most popular argument made in support of TIF is that it doesn’t cost governments anything because the incremental revenues aren’t available unless the project is completed as planned. This argument is at least plausible when the only taxes pledged are property taxes, because the increase in property value is direct, related and easily measurable. However, when TIF allows taxes to be pledged that are not as directly tied to the property — such as income, sales and occupational taxes — as is the case in Kentucky, this argument falls apart. Further, for it to be a valid argument that TIF arrangements are cost-free to governments, it must be true that the development would not occur “but for” the infusion of public tax revenues – and this is very difficult to prove.

Kentucky TIF – More Generous Than Most 

The use of TIF became prominent in Kentucky beginning in 2000, with the enactment of two bills – one that authorized pilot projects in Jefferson County that included the possible pledge of both local and state tax revenues, and one that authorized the use of TIF by local governments 1.  These new TIF laws went beyond those available in most other states by allowing:

  • The pledge of local taxes besides property taxes including local occupational taxes;
  • The pledge of state sales, individual income and corporate income taxes; and
  • The “footprint” of the TIF district – the physical area from which tax increments are received – to be larger than the area encompassed by the land actually being redeveloped 2.

The pledge of taxes beyond property taxes is problematic because there is no requirement those revenues come from new economic activity that occurs as a direct result of the development. The result is that existing tax revenues being received by the state and by local governments — in other words revenue that was not generated by the development – can easily be diverted to the developer. Here is how that happens:

An existing business with its current employees relocates from outside the TIF footprint to inside the TIF footprint after the development is completed. Under Kentucky’s TIF laws, the income and occupational taxes paid by that business and the employees of that business are counted as “new revenues” for purposes of the TIF. Although the revenues are not “new revenues” from the standpoint of the Commonwealth, they are “new revenues” for purposes of the development. This situation constitutes a direct diversion of existing revenues to the project developer that would otherwise be deposited in the General Fund or be available to support a local government. There is no new economic activity, and no new job creation. Instead, there is a real and measurable loss of revenues for the Commonwealth and the local government. There is also an empty building outside the TIF footprint vacated by the company that relocated.

This same situation occurs when a business currently collecting sales tax on behalf of the Commonwealth moves from outside the footprint to inside the footprint.  No new activity and no new revenues result but tax dollars are diverted and another vacant building is left outside the TIF footprint.

Inadequate Accountability

For a TIF project in Kentucky to move forward with state participation, the Office of State Budget Director (OSBD) and the Finance and Administration Cabinet must find that the project has a net positive impact on the Commonwealth 3. At first blush, this may seem like an effective way to ensure that approved projects do not result in less revenue for the Commonwealth. However, at the time this determination is made, information is often not available relating to the specific businesses that will be located within the footprint, or how many of those businesses are simply relocations that result in no real new revenue for the Commonwealth. This initial determination is never revisited or corrected when the project is complete to reflect what actually happens. Thus, this “safeguard” really isn’t much of a safeguard at all. Instead, there is a very large loophole through which existing state and local tax revenues can easily be diverted.

Expansions and Exceptions Further Broaden Reach

Kentucky’s TIF statutes have been amended eight times since 2002 and in almost all cases, the amendments broadened the scope of the program, expanded the list of expenses that can be recovered by developers, or deleted required findings that local governments must officially make to justify the use of TIF and reporting requirements. Most of these amendments were made to accommodate individual projects that could not meet the requirements to qualify initially, or that were having trouble meeting the requirements to begin receiving increments after approval. These amendments all moved Kentucky further from the norm for TIF, and raise concerns that there is no end in sight to the continuing “creep” and corresponding increasing cost that has plagued this program since its inception.

Lots of Revenue, Little Transparency

Since 2002, 24 TIF projects have been approved for state participation, with four additional projects currently in the preliminary approval stage 4. The total incentive amount that could be claimed from the pledge of state sales, income and property taxes over the next several years is $3.1 billion 5. Currently, 10 projects have progressed to the point that tax increments are being received. The most current tax expenditure report produced by the Kentucky Office of State Budget Director estimates that the TIF program will reduce state revenues by $22.3 million in 2018 6.

While aggregate data show the large fiscal impact of TIF on the state of Kentucky, there is no way to know how much each project receives in incremental revenue payments each year as this information is not required by law to be made public. The amount of tax dollars diverted through the TIF program will only grow larger as projects currently receiving increments ramp up to full capacity, more approved projects qualify to begin receiving increments and KEDFA approves additional projects.

There is also uncertainty about the cost of TIF at the local level. Kentucky allows cities and counties to establish local only TIF development areas and to pledge local property and occupational license taxes generated within the development area to support it. Local governments can also impose special assessments against anyone working in the TIF development area whose job was created because of the development. Those assessments can provide additional revenue to satisfy debt incurred for the development. Unfortunately, there are no requirements for centralized reporting for local TIFs, so there is no way to know without examining records in each city and county in the Commonwealth how prevalent the use of local only TIF is, the nature of the projects supported and how much has been pledged.

New Government Accounting Standard Board (GASB) rules that require local governments to disclose the aggregate revenue lost to economic development tax-based subsidies, including TIF, will help 7. Because of these new rules, there will be additional information available from local governments on economic development incentives, with major tax abatement programs reported separately. However reporting on specific projects will not be required.

Conclusion and Recommendations

In the few short years after its creation, Kentucky’s already overly generous TIF program has been expanded, its safeguards have been reduced and its original purposes have been forgotten. The resulting diversion of public resources to developers should reexamined, and the program reformed. The Commonwealth and local governments must weigh the value and cost-effectiveness of the program against other public investments, and like other tax incentive programs be willing to end such programs based on such an evaluation. At a minimum, we should pursue the following policy changes:

  • Kentucky should amend its laws to more closely resemble TIF programs available in other states that limit the revenues pledged to property taxes, and that limit the use of TIF for blighted, abandoned or brownfield property.
  • If Kentucky’s program is not limited to property taxes, the legislature should amend Kentucky’s statutes to exclude taxes paid by existing businesses and their employees relocating from outside the TIF footprint to inside the footprint from new revenues in calculating the increment due the developer.
  • The Cabinet for Economic Development should be required to report the amount of incremental revenues received by each project on an annual basis.
  • Policymakers should require centralized reporting of detailed information about each TIF project approved by local governments so that the public can easily access this information.
  1. 2000 Acts, Ch. 326, http://www.lrc.ky.gov/statrev/tables/00rs/actsmas.pdf, codified as KRS 65.490 to 65.499. 2000 Acts, Ch. 358, http://www.lrc.ky.gov/statrev/tables/00rs/actsmas.pdf, codified as KRS 65.680 to 65.699.
  2. Allowing the footprint from which revenues are derived to be larger than the actual development area receiving TIF can work for or against a project, depending on the circumstances. Current state law does not allow the footprint to be larger than the actual development for projects in which the state participates, however the law relating to local only TIF still allows the footprint to be larger. Either way, if the footprint extends beyond the actual development, it is difficult to make a case that the development had any impact on revenues of surrounding businesses.
  3. Note that this requirement applies to projects approved after January 1, 2008.  There were five projects approved by the TIF Commission over a three month period at the end of 2007 for which most of the findings and  the requirements were waived, including the independent consultant report and net positive impact determination, even though the statutes in effect at that time also included all of these requirements.
  4. “Tax Increment Financing Projects with State Participation”, Kentucky Cabinet for Economic Development available at https://thinkkentucky.com/kyedc/pdfs/TIFProjects.pdf. Retrieved June 12, 2017. Three projects that received approval have since been listed as inactive, leaving 25 active or in process projects.
  5. Project periods range from twenty years to over forty years and this number reflects the total amount that could be claimed by all approved projects over the life of those projects.
  6. “Tax Expenditure Analysis Fiscal Years 2016-2018”, Kentucky Office of State Budget Director available at http://osbd.ky.gov/Publications/Documents/Special%20Reports/Tax%20Expenditure%20Analysis%20Fiscal%20Years%202016-2018.pdf. Retrieved June 12, 2017.
  7. “Summary of Statement No. 77 Tax Abatement Disclosures”, Governmental Accounting Standards Board available at  http://www.gasb.org/cs/ContentServer?c=Pronouncement_C&pagename=GASB/Pronouncement_C/GASBSummaryPage&cid=1176166392168. Retrieved June 12, 2017.

Troubling Hints About Direction for Tax Reform

We don’t know yet the specifics of a tax reform plan the governor wants the General Assembly to consider in a 2017 special session. But this week, in a letter sent to legislators indicating the session will be held sometime after Aug. 15, the governor said Kentucky can become “more competitive with surrounding states like Indiana and Tennessee by lowering or eliminating certain taxes.” Given the makeup of those two states’ tax systems, this language suggests a potentially harmful direction that involves lowering taxes for the wealthy and corporations and a shift to greater reliance on taxes from low- and middle-income households.

Some features of Indiana and Tennessee’s tax codes the governor might be pointing to:

  • Tennessee lacks a broad based individual income tax, and its tax on investment income was cut in 2016 and will be completely phased out by 2022. In recent years, Indiana has cut its individual income tax to 3.23 percent (Kentucky’s top rate is 6 percent).
  • Tennessee got rid of its inheritance tax on wealthy heirs in 2016; Indiana did the same in 2013.
  • Just this spring, Tennessee gave a $113 million business tax cut to manufacturers, and in 2012, Indiana started phasing in a reduction to the state’s flat corporate income tax rate, to conclude in 2022 at 4.8 percent (Kentucky’s top rate is 6 percent).
  • Neither state taxes business inventory.

The corporate tax cuts described above mean profitable businesses chip in less for the public services that help them succeed. And the result of less reliance on income and inheritance taxes is clear (see graph below): those at the top in Tennessee and Indiana pay an even smaller share of their income in state and local taxes than the wealthiest Kentuckians do, and their lowest-income residents pay an even higher share than the poorest Kentuckians. Tennessee has the 7th-most regressive tax system of all 50 states and Indiana has the 10th-most regressive while Kentucky is ranked 33rd, according to a study by the Institute on Taxation and Economic Policy.

Part of that heavier reliance on low-income Hoosiers and Volunteers is due to the higher sales tax rate in Tennessee and Indiana of 7 percent compared to Kentucky’s 6 percent rate (Tennessee also taxes groceries at 5 percent and has significant local sales taxes). Becoming more like these states by cutting taxes for the people at the top and relying more heavily on taxes from everyone else will make Kentucky’s system even more acutely upside-down than it already is, where those with the most pay the least in taxes of any income group.

Though Governor Bevin does say in his letter that he also wants to “[close] special-interest tax loopholes” (which constitutes real reform), lowering and eliminating taxes like those described above amounts to huge tax cuts for the powerful interests at the top. In other words, such an approach to changing our tax system could pile on, rather than clean up special interest tax breaks – holes in our tax system that are already draining revenue growth from our General Fund and leading to round after round of budget cuts and pension underfunding.

While the governor rightly stresses the need for “sufficient” revenue, he says “the best solution to Kentucky’s financial challenges is economic growth” which he implies will be generated through “competitive” tax changes. Other states that have attempted trickle-down tax cuts to generate private sector investment and hiring (and thus, more tax revenue), have found themselves instead facing lackluster economic growth and budget shortfalls in the hundreds of millions of dollars. The Kansas legislature just repudiated its failed experiment in reducing income taxes by rolling back those cuts and reinvesting in its schools and other public investments.

Taxing the poor more and the wealthy less like Tennessee and Indiana do is not going to solve Kentucky’s problems, if that’s where the governor is heading. What the commonwealth really needs is for leaders to prioritize investments in our state and communities above tax cuts for powerful interests.

Kansas’ Experiment Yields Valuable Lessons for Kentucky

By Heidi Holliday

You’re welcome, America. Our state, Kansas, just wrapped up a 5-year long experiment in governance from which the other 49 states can now glean some important lessons. The Kansas Legislature has voted to roll back much of the 2012 package of tax cuts that sent the state into a downward spiral of financial instability and weakened the Kansas’ public schools, universities, Medicaid program and virtually everything else that the state funds.

With the state facing yet another budget shortfall of $900 million, government leaders decided that enough was enough. Governor Brownback, who heralded the 2012 experiment, was proposing yet more temporary band-aid approaches and more cuts deal with the shortfalls. The Legislature chose a different path and instead sent the Governor a bill that would raise more than $1.2 billion in new revenue over two years by, among other things, repealing a costly tax break for pass-through income, rebalancing individual income tax rates by reinstating a third tax bracket, and reversing course on the Governor’s plan to eliminate our state income tax. Brownback vetoed the legislation but, with bipartisan support, the House and Senate quickly overrode the veto.

Our state has begun the path to fiscal stability and is closer to becoming a model of good policy choices as much as it is a cautionary tale. The damage done to Kansas from this reckless experiment will not be undone overnight, but other states need not wait to act upon the lessons learned.

Put simply, revenue matters. You can’t get something for nothing. We all want and deserve thriving communities with great schools, parks, and modern roads and bridges; and we chip in to pay for that. That’s what taxes are for.

Because of the scope of the 2012 changes, it didn’t take long before Kansans in every corner of the state began connecting the dots between the actions of state lawmakers and the quickly eroding quality of the things that make for a good economic foundation in every community. With every subsequent shortfall, the picture became more clear. Meanwhile, the promised economic boom —and the revenue rebound that would supposedly follow — never happened (as economists predicted). In the last few election cycles, voters have viewed candidates and their promises through a different lens, and the 2017 Legislature had the experience and public backing to chart a new course.

Most state tax codes, including ours, need further reform, but it’s high time that state tax policy adhere to one basic, proven (and now proven once again) principle – states need revenue to invest in the things that create thriving communities and a prosperous economy. Kansas just learned this lesson again, the hard way, so that your state doesn’t have to. You’re welcome.

Heidi Holliday is the executive director of the Kansas Center for Economic Growth.