Some Federal Lawmakers Want to Use New Tax Cuts for the Wealthy as Cause to Undermine Basic Supports for Kentucky Families

The tax bill Congress passed yesterday was the first in a two-step plan to cut taxes for the wealthy and corporations and pay for them later through cuts to critical investments that help everyday Kentuckians. The final tax bill will increase taxes for middle- and low-income families, end health care for millions and increase federal deficits. Step two of the plan is slated for next year, when lawmakers indicate the increased deficits may be used to justify dangerous cuts to everything from food assistance for families and education to Medicare, Medicaid and infrastructure.

Step One – Tax Cuts for the Wealthy and Corporations

The tax bill Congress sent to President Trump yesterday is grossly regressive and targeted to benefit the ultra wealthy and large corporations, not everyday Kentuckians. In fact, foreign investors will benefit more from the tax bill in 2019 than the bottom 60 percent of Americans combined. Looking at just Kentucky taxpayers in 2019, a hugely disproportionate share of the benefit will go to those at the top: while the wealthiest 1 percent get 26 percent of the total benefit, the bottom 60 percent of Kentuckians cumulatively receive only 15 percent of the total tax cut (see graph below).

By 2027, when most individual tax changes expire except the bill’s slower-growing inflation rate for tax brackets, the bottom 60 percent of Kentuckians will face a tax increase on average while the top 1 percent still receive a tax cut averaging $4,700, thanks to permanent corporate income tax cuts and other changes that primarily benefit the wealthy.

The tax cut package will worsen income inequality in the U.S. economy. The bill also ends the individual mandate in the Affordable Care Act, which will lead to 13 million fewer Americans with health coverage, including an estimated 181,000 Kentuckians, and raise premiums for the rest by 10 percent. A separate analysis estimates that, in Kentucky, individual market premiums for a family of four will increase $1,690.

Step Two – Harmful Cuts to Programs that Help Kentuckians Across the State

Members of Congress are already talking about cutting programs that assist Kentucky families and communities. As mentioned, this two-step plan is to drive up deficits by $1.5 trillion with tax cuts for the wealthy and corporations and then use higher deficits to justify program cuts mainly affecting low- and middle-income families. A number of Republican leaders have even specifically said that once the tax bill is passed, they will turn to “welfare reform” — or cuts to programs that help families with limited resources afford food, housing, health care and other basic needs. The theory that tax cuts will eventually trickle down and benefit these families is false, and the fact remains that cuts to vital federal investments could cause direct harm to hundreds of thousands of Kentuckians.

Medicaid

Medicaid is a cornerstone of our system of health care coverage, providing access to important preventative services, substance abuse treatment and care for chronic conditions, among other programs. A total of 1.4 million Kentuckians are covered by Medicaid — including seniors, people with disabilities, children and low-income workers. Medicaid also injects millions of federal dollars into every Kentucky community, resulting in jobs for nurses and other care providers among other benefits.

Supplemental Nutrition Assistance Program (SNAP)

SNAP helps low-income Kentuckians afford basic food needs and boosts the economy during downturns when more people become eligible. In February 2017, 651,889 Kentuckians (308,453 households) were receiving SNAP. In 2016 in Kentucky:

  • More than 68 percent of SNAP participants were in families with children.
  • 38 percent were in families with members who are elderly or have disabilities.
  • More than 36 percent were in working families that still struggled to put food on the table.

Supplemental Security Income (SSI)

SSI provides income support for individuals who are disabled or elderly and have little income and few assets. It is a lifeline for very low-income families caring for children with severe disabilities — including Down syndrome, cerebral palsy, autism, intellectual disability and blindness. SSI provides financial support to these families that, due to the demands of caring for a child with a disability, face higher costs and more demands on their time. Without SSI, many more Kentuckians with disabilities would be in poverty; the program has been shown to lift half of otherwise poor child beneficiaries out of poverty and reduce deep poverty. As of December 2016, there were 180,613 Kentuckians receiving Supplemental Security Income (SSI) benefits.

Pell

The Pell Grant program provides financial assistance for low-income individuals to attend and complete college. By increasing access to education and training for those who would otherwise not be able to afford it, Pell also helps to address poverty. Pell Grant awards are already modest in comparison to the rising costs of college, and cuts would make higher education out of reach for more Kentuckians. In 2017, 102,360 students in Kentucky received a Pell Grant and the state’s postsecondary institutions received $372,576,000 from Pell.

Non-Defense Discretionary

Federal Non-Defense Discretionary (NDD) grants are investments in critical programs that support Kentuckians, and are currently funded at historically low levels. NDD funds in our state go to education programs such as Head Start, assistance for low-income kids and families such as the Child Care and Development Block Grant and provide a wide range of other services to Kentuckians that make our communities safer and healthier and develop the workforce and economy

Here are KCEP’s fact sheets by Congressional District that show how important these federal funds are to individuals and families across the state.

Passage of the Dream Act Would Benefit Kentucky

In September, the Trump Administration announced the end of DACA (Deferred Action for Childhood Arrivals), a program established by executive order that granted immigrant youth who were brought to the U.S. as children temporary relief from deportation and authorized them to work. By passing the Dream Act, Congress can restore and even strengthen the legal protections for these young Kentuckians who contribute to our commonwealth by going to school, working, paying taxes and more. In the absence of a Dream Act, Dreamers, their families and our communities will be harmed.

Passing the Dream Act Would Boost Kentucky’s Economic Growth

The Dream Act would provide legal resident status as well as the opportunity to naturalize based on Dreamers’ education, employment and service qualifications. This provision would encourage many young immigrants to pursue higher education and training. Because a more educated workforce is a more productive workforce, and because Dreamers could pursue careers that best match their skills, the Dream Act would boost economic growth.

The Center for American Progress estimates that if Congress passes the Dream Act, Kentucky’s $197 billion Gross State Product would see a long-term annual increase of $100 million (see graph below). That estimate grows to $334 million a year when it is assumed that half of the people eligible to obtain lawful permanent residence do so by getting either a 2-year or 4-year college degree.

In their analysis of the federal impacts of the Dream Act, the Congressional Budget Office estimates the legislation would increase tax revenues as well as social spending for a net cost to the federal government of $26 billion over 10 years. The underlying revenue estimate is based on an increase in the reporting of employment income, and does not include additional revenue associated with higher earnings and greater productivity stemming from the Dream Act.

Conversely, if Congress does not pass the Dream Act and DACA protections continue to expire for these young Kentuckians, they will also lose access to channels for full tax compliance, their drivers’ licenses and in-state tuition. Their contributions to Kentucky’s economy will diminish along with their ability to pursue productive careers in fields that suit them.

Tax Revenues in Kentucky Would Go Up with Dream Act

The Institute on Taxation and Economic Policy (ITEP) estimates that 6,000 (formerly) DACA-eligible Kentuckians currently contribute a total of $8.1 million in local and state taxes annually through sales and excise taxes, property taxes and income taxes. Their effective tax rate of 9.1 percent is higher than that paid by the wealthiest 1 percent of Kentuckians.

If Congress passes a Dream Act and these young immigrants are provided with work authorization and a pathway to citizenship, their earnings as well as their tax contributions would increase. ITEP estimates tax contributions would rise by $4.6 million (see chart below). In the absence of the Dream Act, however, DACA protections, employment and education opportunities, and tax contributions will erode – the latter by $4.4 million.

Passage of the Dream Act is important for Kentucky’s economy and for the young immigrants who call Kentucky home.

 

Kentucky Advocate Says DREAM Act Would Boost Local, State Economy

New Tax Expenditure Report Obscures Growing Costs

The Office of State Budget Director (OSBD) released the Tax Expenditure Report for the 2018-2020 biennium late last month. The new report is misleading because it does not include in the grand total of all expenditures located in the executive summary a number of tax expenditures detailed in the body of the report, making total costs appear smaller than they actually are.

The purpose of the Tax Expenditure Report, which is required by language in the executive branch budget, is to identify revenues lost for the current and next two fiscal years from exemptions, exclusions or deductions from the base of a tax, or preferential tax rates. Policymakers use the Tax Expenditure Report to help identify tax preferences, and to know how much they cost, and as such, the policy decisions that are made about what items are included in the report and what items are excluded is important.

In the 2018-2020 version of the report, the OSBD significantly departs from past practice in a couple of important ways. For the first time, OSBD has separated out exemptions, exclusions, and deductions from the individual income tax that exist because of Kentucky’s general conformance with the Internal Revenue Code (IRC). In justifying this change, OSBD states: “Because of the coordination with Federal tax rules, the Office of State Budget Director believes that it would not be practical or advisable to consider the elimination of many of the Federal expenditures.” The OSBD takes this position even though many states, Kentucky included, often decouple from the provisions of the IRC when Congress enacts provisions that are costly or otherwise undesirable for states to adopt. In fact, the instructions for Kentucky’s individual income tax return for 2016 list 28 differences between federal and state income tax laws. The OSBD identified some $3 billion in tax expenditures that it states have been excluded from the total amount of tax expenditures provided in the executive summary, however it appears that the total does, in fact, include the individual income tax expenditures identified as federal.

To complicate matters further, the OSBD’s classification and separation of expenditures as federal or state is not consistent. The OSBD has classified two income exclusions from the individual income tax that are strictly state-based, with no relationship to the IRC, as federal exclusions from income. Those are the state-only exclusion of military pay, at $10.7 million in 2018, and the state-only exclusion for private pension and individual retirement account income at $339.6 million in 2018. The report also lists the state postsecondary education tuition credit, valued at $28.7 million in 2018, as being a federal credit when it is a state credit. Likewise, there are some expenditures that clearly stem from our state’s conformance with the IRC listed as state expenditures. The report also completely fails to list the expenditure related to state and  local public pension income received, and it is unclear whether this large exclusion is completely missing, or is included as part of one of the other listed pension exclusions. These all appear to be errors, and they are important errors to note when using the report.

Finally, the OSBD has changed the way it identifies services not subject to the sales tax in the 2018-2020 report, although it retains its oft-stated opinion that services should generally not be included as a tax expenditure because they are categorically not a part of the intended base of the tax. The 2016-2018 report listed broad categories of services with no detailed identifying information to allow users to determine what specific services were included within the broad categories. The 2018-2020 report describes excluded services in much more detail using North American Industrial Classification System (NAICS) codes to identify specifically listed services. The 2018-2020 report identifies $4.38 billion in lost revenues from not taxing listed services, compared to $2.78 billion identified for 2018 in the 2016-18 report – so the new, more refined list identifies the loss of an additional $1.6 billion in potential revenues in 2018 because we do not broadly tax services.

Contrary to the opinion of the OSBD, many services should be subject to sales tax, based on the purpose of the tax, which is to generate revenues from consumer spending. At the time our sales tax was enacted, consumers primarily bought tangible goods, so it makes sense that those purchases were the primary focus of the tax. Since that time, consumer spending on services has increased dramatically with approximately two thirds of all consumer spending today being for services. The failure of our sales tax to capture this growing category of expenditures means that the revenues from the tax simply cannot keep up with economic growth, leaving us short of the revenues we need to make crucial budgetary investments.

If we include the newer, higher number for excluded services, the total tax expenditure number for 2018 grows to $13.75 billion compared to $13.14 billion for the same year in the prior tax expenditure report. Kentucky continues to give away more money in tax breaks than we collect in tax revenue and our budget problems are the result.

Kentucky’s Universities Brace for ‘Bigger Cuts Than They’ve Ever Seen’

McConnell Touts Tax Bill Benefits, Skeptics See Few For Kentucky

Tax Plan an Enormous Giveaway to the Wealthy that Will Harm Kentucky Families

Will Kentucky’s Congressional Delegation Make It Worse By Voting to Cut Critical Programs in 2018?

After both the U.S. House and Senate voted to pass the GOP tax bill, Jason Bailey, Executive Director of the Kentucky Center for Economic Policy, released the following statement:

“The tax plan passed by Congress is nothing more than a massive handout to major corporations and the ultra wealthy that ultimately raises taxes on low- and middle-income Kentucky families. The plan will end health care for millions of Americans, raise premiums and further threaten working families by setting the stage for dangerous budget and program cuts. It is no surprise that this is the most unpopular tax legislation in three decades. It serves powerful special interests instead of the American people.

“Congressional leaders are wasting no time moving forward with the second step of their agenda. President Trump and Speaker of the House Paul Ryan say they intend to come back next year and seek deep budget cuts that would further hurt low- and middle-income Kentuckians by targeting everything from nutrition assistance for families to education, Medicaid and infrastructure. And because proposals to cut federal spending almost always involve shifting costs down to state and local governments, this agenda will put even more pressure on Kentucky’s already strained state budget.

“As a commonwealth, we are stronger through public investments in our people, families and neighborhoods. It’s bad enough for Congress to shower unneeded tax breaks on the wealthy, and it will become worse when they use it to justify taking away health care, food assistance and other investments crucial for thriving communities. The whole Kentucky delegation should commit now to stand against budget cuts that would further hurt everyday Kentuckians.”

$10,000 Cap for State and Local Deductions in Federal Tax Bill Could Limit School Revenue Growth

Year-End Results Show Progress Made on Pensions in Last Budget

New reports on Kentucky’s public pension systems show substantial funding progress thanks to sharply increased contributions to the plans in the 2016-2018 budget. The extent to which those funding levels are getting us on the right track should be understood before the legislature makes harmful cuts to benefits or demands dramatic additional increases in contributions in the next budget.

Pension Plans on a Stronger, More Sustainable Path

In the 2016-2018 budget, the General Assembly contributed about 94 percent of the actuarially required contribution (ARC) to the Teachers’ Retirement System (TRS), after putting in only about 50 percent the prior year and underfunding the plan ever since 2009. The state also contributed $186 million above the ARC into the state Kentucky Retirement System (KRS) plans. In total, these contributions were 63 percent above what was contributed to all state pension plans in the prior 2-year state budget.

These added payments resulted in real improvements to the plans’ health. Assets grew by $1.9 billion in TRS after falling for 2 consecutive years, increasing from $16.8 billion to $18.7 billion. That system’s funded ratio increased from 54.6 percent to 56.4 percent. Assets also grew in the severely depleted Kentucky Employees Retirement System (KERS) non-hazardous plan, rising from $1.98 billion to $2.09 billion. That improvement comes after its assets had fallen in eight of the previous nine years. The KERS non-hazardous plan’s funded ratio declined, but that’s only because KRS adopted much lower actuarial assumptions for the plan.

A good investment year played a role in these improvements, but the big increase in employer contributions was critical.

Both TRS and KERS non-hazardous are still experiencing negative cash flow, but those gaps shrank considerably compared to the prior year. As the plans continue to grow assets and their returns compound over time, investment income in the form of dividends, interest and realized capital gains will increase and turn the systems’ cash flow positive.

Next Steps Should Maintain Momentum and Avoid Triggering Crisis

The decisions in the 2016-2018 budget went a long way toward putting Kentucky’s pension plans on a strong and sustainable path. Next steps on funding should differentiate between the plans and recognize their distinct needs rather than adopting a drastic, one-size-fits-all approach that could devastate the rest of the state budget.

Despite the good year for KERS non-hazardous, its low level of assets compared to the payouts for current benefits mean it needs extra funding as it gets back on its feet. One approach would provide contributions at least equal to the cost of payouts, which would allow the plan to avoid selling assets to pay benefits and allow it to maximize investment returns. In 2017, payouts exceeded contributions by $114 million. Because of new actuarial assumptions adopted by the KRS board, requested contributions for 2019 will go far beyond that: increasing by $448 million, according to Legislative Research Commission (LRC) staff. That is an aggressive level of funding. While KERS non-hazardous will certainly benefit from those extra dollars, no way to make those added contributions has been identified.

The TRS plan is on much stronger footing than KERS non-hazardous, and its $18.7 billion in assets will allow it to continue improving as long as contributions like those in the 2016-2018 budget continue. The TRS board has requested an additional $104 million in 2019 and $71 million in 2020 beyond what was contributed in the last budget to make that possible.

However, pension legislation threatens to require radically bigger contributions to TRS than the system is requesting, putting funding for education and other crucial services in jeopardy. If a pension bill moves TRS to a level dollar funding method that front-loads payment of pension liabilities, it will mean finding an additional $392 million in 2019. Also, if TRS is closed to new members and the state shifts to a 401a defined contribution plan moving forward, TRS will have to lower its investment return assumption. That’s because its membership will increasingly be made up of retired teachers, forcing TRS to maintain a more liquid and conservative portfolio than if it remained open. If its investment return assumption was lowered from 7.5 percent to 6.5 percent, it will cost another $302 million in 2019 according to LRC staff (and the TRS actuary says the assumption will drop even further to 6 percent if the plan is closed). Thus pension legislation resulting in a level dollar method and a lower return assumption could mean requiring over $694 million more in 2019 for TRS alone — money Kentucky does not have in its budget.

Kentucky’s pension liabilities need a measured approach that targets dollars where they are truly needed to nurse the plans toward better health over time. An overreaction to past underfunding could be devastating for a variety of state services, especially if no new revenue is on the table to make added contributions possible.

 

Funding Gap Between Wealthy, Poor School Districts Climb Toward Pre-KERA Levels