The Funding Gap Between Kentucky’s Poor and Wealthy School Districts Continues to Grow

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As a result of decreasing reliance on state funding for education and an increasing reliance on local school district resources, the gap in per-pupil funding between the state’s poorest and wealthiest districts is growing. This “equity gap” shrank dramatically in the 1990s after the Kentucky Education Reform Act (KERA) was passed. But since then, the trend has reversed and funding for Kentucky’s school districts has become less equitable, raising the same kinds of issues that prompted the filing of the lawsuit that resulted in the passage of KERA.

In 1989, in Rose v. Council for Better Education, the Kentucky Supreme Court held that the state had failed in its duty, put forth in Section 183 of the Constitution of Kentucky, to “provide for an efficient system of common schools.”1 One of the central tenets of the Rose decision was that the General Assembly must “provide equal educational opportunities to all Kentucky children.” The court explained:

The system of common schools must be adequately funded to achieve its goals…[and] must be substantially uniform throughout the state. Each child, every child, in this Commonwealth must be provided with an equal opportunity to have an adequate education. Equality is the key word here. The children of the poor and the children of the rich, the children who live in the poor districts and the children who live in the rich districts must be given the same opportunity and access to an adequate education. This obligation cannot be shifted to local counties and local school districts.

As a part of KERA, the Office of Education Accountability (OEA) was established and charged with monitoring funding equity among school districts (in addition to other responsibilities). OEA prepared and submitted a School Finance Report each year between 1992 and 2006, with the analysis going back to 1990. In 2006, the General Assembly amended the law to require the report only upon request by the legislative Education Assessment and Accountability Review Subcommittee.2 Since then, OEA has produced just one report with analysis through 2010, which was presented to the subcommittee in 2012.3

This analysis updates that report through 2016, focusing on one specific application of OEA’s quintile-based method – measuring the per-pupil state and local funding gap between the wealthiest districts and the poorest districts that each represent 20 percent of the student population. It provides strong evidence that Kentucky’s education funding continues to grow less equitable.

Kentucky’s Education Resource Gap Is Nearing Pre-KERA Levels

OEA has historically used a quintile-based analysis to examine the level of funding equity among school districts. As the graph below illustrates, the gap between the top and bottom quintiles is climbing back toward the level it was before KERA. Adjusted to 1990 dollars, in 2016 state and local funding per-pupil in the poorest Kentucky’s school districts was $1,399 less than in the wealthiest districts, compared to $1,558 in 1990.4 In current dollars, the gap in state and local funding between students in the top and bottom quintiles in 2016 was $2,570.

As a share of total funding for the poorest schools, this gap is not as close to pre-KERA levels as the dollar size shown above, but still headed in that direction. In 1990, the gap in funding between the top and bottom quintiles was equal to 58 percent of state and local funds for the bottom quintile. That share fell to 14 percent by 1997 but has been creeping back up since. In 2016, the gap was almost a third of the bottom quintile’s state and local funds – 31 percent.

OEA’s 2012 analysis looked at the school funding equity gap from a number of angles, including the aggregate equity gap between the wealthiest and each of the other four quintiles, the Gini coefficient and coefficient of variation equity measurements, and with and without on-behalf funding.5 Those different methods all pointed to the same conclusions. In OEA’s words: “while the magnitude of the equity gap varies depending on the method used, all methods consistently show that the equity gap for local and state (combined) revenue has been widening in recent years.”6

Attempting to update each of OEA’s analyses is beyond the scope of this report. However, we did also look separately at the impact of on-behalf funds on school funding equity in 2016. These substantial state resources – $1.3 billion in 2016 – pay for teacher pensions, vocational training and health and life insurance.7 On-behalf funds are not included in the graph above because they have been reported inconsistently over the time period. However, including on-behalf funds using KDE data available more recently and OEA’s 2012 analysis does not mitigate the trend identified in the graph. The total state and local per-pupil funding gap between the 1st and 5th quintiles is widening when on-behalf funds are included — from $2,075 in 2010 according to OEA to $2,625 in 2016 according to KCEP’s analysis (both figures in 2016 dollars).8

Relative to the equity gap that doesn’t include on-behalf funds, OEA found that in 2010 on-behalf funds slightly narrowed the gap in per-pupil funding between the poorest and wealthiest quintiles by $192 (in 2016 dollars). But since then, on-behalf funds have grown more per-pupil in the wealthiest quintile of districts than in the poorest quintile; our analysis shows that on-behalf funds slightly widened the gap in 2016 by $55. Unlike state SEEK funds, state on-behalf funds have little to no equalizing effect on total district resources.9

Mechanisms that Improved Equity Under KERA Rely on Adequate State SEEK Funding

In Rose v. Council for Better Education, the Kentucky Supreme Court was clear that achieving equity would require new revenue – the General Assembly could not just reallocate already inadequate resources. In 1990, legislators responded by passing KERA (HB 940) which – in addition to reforming academic expectations, performance measurement, local decision-making, teacher development, oversight and accountability, wraparound services for students and more – improved funding adequacy and equity.10 The new core funding formula, Support Education Excellence in Kentucky (SEEK), guaranteed a minimum amount of funding per student and established a formula that divides the responsibility between school districts and the state, taking into account district property wealth – or lack thereof.

Through state level tax changes, the legislature raised an estimated $1.3 billion in new revenues for the General Fund over two years, with the vast majority going to education (SEEK and non-SEEK).11 These measures included, in order of their revenue-positive fiscal impact:

  • Getting rid of several individual income tax deductions by conforming to the federal tax code, as well as eliminating the state deduction for federal income taxes paid.
  • Increasing the sales tax rate from 5 percent to 6 percent.
  • Increasing corporate income tax rates by one percentage point, bringing the top rate to 8.25 percent.12

Under the KERA funding formula, local districts are required to levy, through a combination of property, motor vehicle and permissive taxes, a minimum of 30 cents per $100 of assessed property to participate in the SEEK program.13 SEEK funds are distributed on a per-pupil basis, and the amount generated locally is equalized by the state to match the guaranteed SEEK base, which is established by the General Assembly in the biennial budget.14 This formula means local districts with the wealth to generate more revenue receive fewer state dollars, while poorer districts with less capacity to generate revenue receive more from the state.

Local districts also have the authority to:

  • Generate an additional 15 percent of the adjusted SEEK base, otherwise known as Tier I funding, which the state partially equalizes. The tax rate that generates Tier I funding, referred to as the “HB 940” rate, is established considering revenues from other permissible taxes levied by the school district. No portion is subject to voter recall. Absent these KERA provisions, school districts would be subject to voter recall on the portion of any levied rate that generates more than 4 percent real property revenue growth over the prior year.15
  • Generate up to 145 percent of the adjusted SEEK base, subject to a voter referendum. Amounts generated through this levy are referred to as “Tier II” revenues, and are not equalized by the state. Tier II was established to set an upper limit on local effort, although there are some districts – due to grandfathering and anomalies that occur because of the interaction with other tax provisions – that currently levy a rate exceeding the Tier II upper limit.16

In theory, the shared responsibility between the state and local school districts should provide an adequate baseline of funding for all school districts, while allowing local communities, within limits, to exceed the baseline. In reality, the lack of meaningful state revenue-supported increases in the SEEK guaranteed base and Tier I equalization over the past several years has resulted in local school districts making up for lagging state resources through additional local levies. The state has, for example, shifted from fully funding the costs of transportation in school districts calculated by a formula to funding only slightly more than half of those costs. The increased reliance on local resources for school costs has resulted in a growing funding gap between wealthy and poor districts due to their differing abilities to generate revenue.17

Less State Revenue, More Local Effort

Amendments to the tax code the General Assembly passed under KERA in 1990 increased state revenue, but revenue has eroded since then.18 New and growing tax breaks have left fewer dollars for all public investments including education.19 Since the Great Recession, multiple rounds of state budget cuts have reduced education funding through direct cuts and freezes, which also amount to cuts once inflation and other cost increases are taken into account.20 Including SEEK and non-SEEK funds (which includes revenue for preschool, Family Resource and Youth Centers (FRYSCs), after school programs, textbooks and teacher professional development), audited per-pupil state revenue dropped an inflation-adjusted 14 percent between 2008 and 2016.21

Illustrating the shift in reliance from the state to local governments, total audited per-pupil local revenue increased by 5 percent over the same span of time. This shift has been occurring for decades, as illustrated by the graph below which shows that the share of state and local funding coming from the state has declined, while the share from local districts has increased.22

As noted previously, the problem with an increased reliance on local resources – and why such reliance leads to greater disparities in per-pupil funding – is that wealthier school districts have a larger tax base than poorer districts from which to raise additional revenue. In a 2013 analysis of local ability, KCEP estimated that with the same 4 percent increase the richest Kentucky school district could generate over 10 times more revenue per student than the poorest district.23 This 4 percent analysis is particularly relevant because it corresponds with the maximum tax rate a district can typically levy without the voter recall option.24 KDE data show the number of local districts levying the 4 percent rate has increased since KERA and spiked around the recession when state revenue was especially low.25

KDE data also indicate that despite their limited tax bases, poorer districts are demonstrating substantial effort to generate local resources with what they have. In 2016, the median per-pupil property assessment among all 173 school districts was $371,282. For the 82 districts levying the 4 percent rate – with per-pupil assessments ranging from $142,853 to $942,014 – the median property assessment was $373,172. That means a similar number of districts both below and above median property wealth chose to levy the 4 percent rate.

One particular challenge some poor school districts currently face is related to the waning coal industry: as coal companies close or reduce operations in impacted school districts, their tax payments on real and tangible property decrease. In turn, unmined mineral tax revenues decrease as far less coal extraction has led to reductions in the value of coal land that will no longer be mined. Based on analysis of KDE data, in the 2016-2017 school year the re-assessment alone reduced total local funding in the poorest quintile of school districts by $1.2 million and in the second quintile by $2 million. School districts in the top two quintiles were not impacted by the change in unmined mineral assessments.

The map below shows the distribution of quintiles across the commonwealth:

Hard-Earned Gains in Achievement at Risk

Kentucky’s schools have made major strides since KERA. The University of Kentucky’s Center for Business and Economic Research (CBER) found in 2011 that Kentucky had moved up on the Index of Educational Progress between 1990 and 2009 from 48th to 33rd place – more progress than most states  (over that time, our neighbor state Tennessee went from 44th to 42nd place).26 CBER also recently found that, once obstacles to cost-effective education spending like poverty, poor health and limited English proficiency are accounted for, Kentucky is one of just 11 states where the return on investment for education spending is higher than would be expected.27 In other words, these dollars are well spent.

Even with Kentucky’s efficiencies, research has found a causal relationship between funding levels and student outcomes. A forthcoming peer-reviewed study in the Quarterly Journal of Economics finds that school finance reforms like KERA improve educational attainment for students from low-income families as well as economic outcomes later in life like wages, family income and poverty incidence.28 Another working paper from the National Bureau of Economic Research finds improved equity also helps close achievement gaps between low-income school districts and economically better-off communities.29

The per-pupil state and local funding gap between Kentucky’s wealthiest and poorest school districts is widening and approaching the level it was before KERA. Without significant new state revenue that will grow reliably over time to improve per-pupil funding, we will lose gains made under KERA and experience the consequences of entire communities of students being left behind.

  1. Rose v. Council for Better Education, 790 S. W.2d 186 (Ky. 1989), https://nces.ed.gov/edfin/pdf/lawsuits/Rose_v_CBE_ky.pdf.
  2. Kentucky Legislature, “Acts of the 2006 Regular Session,” Chapter 170, http://www.lrc.ky.gov/statrev/tables/06rs/actsmas.pdf.
  3. Marcia Ford Seiler, Pam Young, Sabrina Olds et al, “2011 School Finance Report,” Office of Education Accountability, June 12, 2012, http://www.lrc.ky.gov/lrcpubs/RR389.pdf.
  4. In Figure 1, the analysis comparing funding in the first and fifth quintiles for years 1990 through 2010 is from the Office of Education Accountability (OEA). Marcia Seiler et al, “2011 School Finance Report.” KCEP’s analysis for 2011-2016 relies on OEA’s methodology. Wealth is based on districts’ per-pupil property assessments and quintiles are enrollment-based. Changes have been made to the underlying data since OEA’s 2012 analysis: in 2014, state on-behalf funds and local activity funds were incorporated into the Kentucky Department of Education’s Audited Financial Reports. On-behalf funds are not included in OEA’s or KCEP’s analysis illustrated by Figure 1, but are discussed subsequently (for KCEP’s analysis of years 2014-2016, we subtracted on-behalf funds from total state revenue). However, isolating activity funds from other local revenue is outside the scope of this report, meaning that these funds are included in KCEP’s analysis in years 2014-2016, slightly increasing the equity gap for these years relative to 1990-2013. A couple of factors mitigate the impact this difference makes in comparing the data across all years from 1990 to 2016. First, the impact of activity funds on the equity gap is small: data from the 2012 OEA analysis show that activity funds increased the equity gap by an average of $25 a year (in 1990 dollars) between 2006 and 2010. Second, activity fund reporting is increasing but not yet robust, meaning data for 2014 through 2016 do not reflect the full extent of these resources as a share of revenue in local districts. Activity funds are contributions to schools from individuals and organizations such as Parent Teacher Association (PTA) donations, athletic and other event ticket sales and revenues from fundraising activities.
  5. The report also adjusts the quintile analysis by using a “comparable wage index” to account for district differences in cost of living, and by factoring in federal revenue and local “activity funds.” In 2016, the total local, state and federal funding gap between the first and fifth quintiles was $2,285 (in 2016 dollars, including local activity funds and state on-behalf funds). A full analysis of the equity gap that incorporates federal funding is not included, as we focus on challenges state decision makers have the ability to redress.
  6.  Marcia Ford Seiler et al, “2011 School Finance Report.”
  7.  Kentucky Department of Education, “Revenues and Expenditures 2015-2016,” http://education.ky.gov/districts/FinRept/Pages/Fund%20Balances,%20Revenues%20and%20Expenditures,%20Chart%20of%20Accounts,%20Indirect%20Cost%20Rates%20and%20Key%20Financial%20Indicators.aspx.
  8.  The aforementioned inclusion of activity funds in the underlying KDE data for 2016 increases the equity gap, although the increase is small. As a point of reference, the size of that increase in 2010 was $36 in 2016 dollars.
  9.  Accounting for variations in the cost of living across districts – which are likely reflected in retirement contributions – would refine this analysis of on-behalf funds, but is outside the scope of this report.
  10.  The Prichard Committee for Academic Excellence and the Kentucky Chamber, “A Citizen’s Guide to Kentucky Education: Reform, Progress, Continuing Challenges,” June 2016, http://prichardcommittee.org/wp-content/uploads/2016/06/A-Citizens-Guide-to-Kentucky-Education.pdf.
  11.  Joseph Stroud, “Governor Signs Historic Education Bill Law Ushers In School Reform, Higher Taxes,” Lexington Herald-Leader, April 12, 1990.
  12.  Kentucky Legislature, “Acts of the General Assembly; Kentucky Educational Reform Act Revenue Measures,” 1990, Western Kentucky University Library, http://www.wku.edu/library/dlps/documents/keralaw07.pdf.
  13.  Districts are also required to levy 5 cents per $100 of assessed property to participate in the state program that supports facility funding.
  14.  The “adjusted SEEK base” also includes add-ons for transportation, at risk and other student populations with additional needs.
  15.  The tax provisions of KERA operate in conjunction with existing broad-based laws establishing requirements and limitations on the levy of property taxes, commonly referred to as the “HB 44” limitations. HB 44 generally provides that any rate levied by a local taxing jurisdiction that generates revenues from real property that are more than 4 percent above what was generated the prior year is subject to recall by the voters of the district. The interrelationship of the two sets of requirements adds a level of complexity to the local district rate setting process. Martha Seiler, Pam Young, Albert Alexander and Jo Ann Ewalt, “Understanding How Tax Provisions Interact With the SEEK Formula,” Legislative Research Commission, November 15, 2007, http://www.lrc.state.ky.us/lrcpubs/RR354.pdf.
  16.  Marcia Ford Seiler et al, “Understanding How Tax Provisions Interact With the SEEK Formula.”
  17.  Jason Bailey, “Vast Inequality in Wealth Means Poor School Districts Are Less Able to Rely on Local Property Taxes,” Kentucky Center for Economic Policy, December 11, 2013, http://kypolicy.org/vast-inequality-wealth-means-poor-school-districts-less-able-rely-local-property-taxes/.
  18.  Since 1991, Kentucky’s General Fund has shrunk from 7.33 percent of state personal income to 5.85 percent, which amounts to more than $2.5 billion in less revenue. KCEP analysis of data from the Office of the State Budget Director and Bureau of Economic Analysis.
  19.  Ashley Spalding, et al., “Investing in Kentucky’s Future: A Preview of the 2016-2018 Kentucky State Budget,” Kentucky Center for Economic Policy, January 4, 2016, http://kypolicy.org/investing-in-kentuckys-future-a-preview-of-the-2016-2018-kentucky-state-budget/.
  20. Many states are finally investing more in education through their core funding formula since the recession, but Kentucky ranks as the 3rd worst among the states still cutting for its per-pupil decline. Michael Leachman, Kathleen Masterson and Eric Figueroa, “A Punishing Decade for School Funding,” Center on Budget and Policy Priorities, November 29, 2017, https://www.cbpp.org/research/state-budget-and-tax/a-punishing-decade-for-school-funding.
  21.  KCEP analysis of data from Kentucky Department of Education, “Annual Financial Revenues and Expenditures,” http://education.ky.gov/districts/FinRept/Pages/Fund%20Balances,%20Revenues%20and%20Expenditures,%20Chart%20of%20Accounts,%20Indirect%20Cost%20Rates%20and%20Key%20Financial%20Indicators.aspx. This estimate excludes on-behalf revenue due to the lack of statewide data prior to 2014.
  22.  As explained previously, this analysis (Figure 2) excludes on-behalf funds and includes activity funds in 2014-2016. Including on-behalf funds would increase the share of total state and local funding from the state. Excluding activity funds would slightly reduce the share of total revenue coming from local governments.
  23.  Jason Bailey, “Vast Inequality in Wealth Means Poor School Districts Are Less Able to Rely on Local Property Taxes.”
  24.   In the years after KERA, the HB 940 rate was often higher than the 4 percent rate. But with more districts having achieved Tier I funding, today the 4 percent rate is typically higher. Until legislative action in 2003, school districts were not allowed to adopt the 4 percent rate if it surpassed the Subsection 1 rate associated with HB 44 – the rate that “produces no more revenue than the previous year’s maximum rate.” Especially since then, the 4 percent rate has given districts the most ability to raise revenue. Very few have exceeded the 4 percent limit under HB 44 which makes the decision subject to voter recall. Marcia Seiler et al, “Understanding How Tax Provisions Interact With the SEEK Formula.” See also Kentucky Department of Education, “Local District Tax Levies” and “Historical Tax Rates by Levied Type,” http://education.ky.gov/districts/SEEK/Pages/Taxes.aspx.
  25.  Kentucky Department of Education, “Local District Tax Levies” and “Historical Tax Rates by Levied Type,” http://education.ky.gov/districts/SEEK/Pages/Taxes.aspx. Marcia Seiler et al, “Understanding How Tax Provisions Interact With the SEEK Formula.”
  26.  The index looks at degree attainment rates, ACT scores, high school drop out rates, AP test scores and other national test scores. Michael Childress and Matthew Howell, “Kentucky Ranks 33rd on Education Index,” University of Kentucky Center for Business and Economic Research, July 2011, http://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1006&context=cber_issuebriefs.
  27.  Christopher Bollinger, William Hoyt, David Blackwell and Michael Childress, “Kentucky Annual Economic Report 2017,” University of Kentucky Center for Business and Economic Research, 2017, http://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1021&context=cber_kentuckyannualreports.
  28.  Kirabo Jackson, Rucker Johnson and Claudia Persico, “The Effects of School Spending on Educational and Economic Outcomes: Evidence from School Finance Reforms,” The Quarterly Journal of Economics, forthcoming, http://socrates.berkeley.edu/~ruckerj/QJE_resubmit_final_version.pdf.
  29.  Julien Lafortune, Jesse Rothstein, Diane Whitmore Schanzenbach, “School Finance Reform and the Distribution of Student Achievement,” NBER Working Paper, February 2016, http://eml.berkeley.edu/~jrothst/workingpapers/LRS_schoolfinance_120215.pdf.

How Federal Tax Proposals Threaten Investments in Kentucky’s Congressional Districts

The vast majority of Kentuckians would be worse off under recent federal tax cut proposals. Far from benefiting the average Kentuckian, the plans would put fiscal pressure on already strained public programs and leave behind nearly 40 percent of children in working families from the Child Tax Credit expansion. Its tax cuts are focused on the very wealthiest, with the top 1 percent in Kentucky bringing in 40 percent of the value of the tax cuts by 2027, even while taxes would go up for more than 1 in 5 middle- to upper-middle income Kentuckians.

Top-heavy tax cuts don’t spur the economy as some suggest. Worse, $1.5 trillion in tax cuts would jeopardize federal mandatory and discretionary programs vital to Kentucky. Using the increased deficit as justification, Congress would later attempt to make deep cuts to programs like Medicaid, Supplemental Nutrition Assistance Program, Supplemental Security Income, Pell grants, HUD housing assistance, the Earned Income Tax Credit and others.

 

 

 

 

 

 

 

 

To see how critical investments help Kentuckians in your Congressional District, and the how the federal tax proposals jeopardize them, select your district below:

1st Congressional District

2nd Congressional District

3rd Congressional District

4th Congressional District

5th Congressional District

6th Congressional District

Federal Tax Cut Framework Is Designed for Millionaires

Under the tax framework released last week by the Trump administration and Congressional leaders, the wealthiest 1 percent of Kentuckians would get 49.5 percent of the total tax cut received by people in the state, according to a new report by the Institute on Taxation and Economic Policy (ITEP). Though the proposed framework has been hailed as a tax break for the middle class, the report finds it would redistribute massive amounts of wealth upward, while raising taxes for some and worsening income inequality nationwide.

The plan’s cuts are extremely top-heavy

The graph below illustrates just how disparate the tax cuts are: the average tax change for Kentuckians with income in the bottom 60 percent is $210, while the average tax change for Kentuckians with income over $1 million is 458 times larger at $96,200.

ITEP’s analysis shows that under the plan, the very wealthy would get larger tax breaks than everyone else based on total dollars, and would also receive a disproportionate share of the total tax break. The entire bottom 60 percent of Kentuckians would get just 14.4 percent of the net tax cut in the state in 2018, while millionaires who comprise just 0.4 percent of the population would receive 40.2 percent of the total tax cut. In all but a few states, the top 1 percent take home at least 50 percent of the tax cuts and nationally, the top 1 percent of Americans will take home 67.4 percent of the tax cuts in 2018.

It isn’t just low and middle income Kentuckians and Americans who lose out in the plan – it is anyone who is not ultra-wealthy. In Kentucky, those making less than $460,800 would see an average tax cut between 0.6 and 0.8 percent as a share of their income in 2018, while people making more (those in the top 1 percent) would see their income increase by 3.2 percent on average. The graph below puts the dollar size of the impact of these tax cuts into perspective.

As is also illustrated in the graph, because Kentucky has fewer wealthy people and they aren’t as rich as wealthy people nationwide, their average tax cut and the total tax cut Kentucky receives are smaller. Though Kentucky tax returns comprise 1.3 percent of total U.S. tax returns in ITEP’s analysis, the commonwealth will receive only 0.9 percent of the benefit from the net tax cut.

The plan will become more top-heavy over time because of a slower-growing inflation index than what is currently used and the fact that the plan’s boost in the Child Tax Credit is not indexed to inflation. The Tax Policy Center estimates that by 2027, 80 percent of the benefit of tax cuts would go to the richest 1 percent of Americans. Income inequality is already too high and growing in Kentucky and the nation, and the plan will only exacerbate the trend.

The Devil is in the details

Although the plan slightly expands the Child Tax Credit and creates a new credit for non-child dependents, a larger, more fully refundable Child Tax Credit for an expanded group of low- to middle-income families and an expanded Earned Income Tax Credit – paid for by cleaning up tax breaks for corporations and the ultra-wealthy – could do more to grow and lift America’s middle class. But the plan doesn’t propose these types of changes. Rather, it slashes taxes for the wealthy and mostly neglects everyone else. The plan would:

  • Repeal the Alternative Minimum Tax (AMT), which exists so that wealthy people who can claim multiple exemptions and deductions still pay a minimum level of taxes.
  • Regressively compress the number of individual income tax brackets and rates from 7 to 3, lowering the top rate from its current 39.6 percent to 35 percent and raising the bottom rate from 10 percent to 12 percent.
  • Double the standard deduction, repeal personal exemptions and eliminate some itemized deductions, a combination that will increase taxes for some moderate- to middle-income and many upper-middle income households – 13.2 percent of all Kentuckians and about 1 in 3 with income between $96,000 and $460,000.
  • Increase the Child Tax Credit (though by a static amount, which will not grow over time, and that does not improve the refundable portion of the credit) and create a new credit for non-child dependents.
  • Cut the corporate income tax rate from 35 to 20 percent, despite the fact that the current effective rate is much lower than 35 percent, and many large corporations pay no taxes.
  • Create a lower tax rate for pass-through income – a huge tax break for many very wealthy individuals and large businesses that could also cause some businesses to restructure as pass-through entities, and some highly compensated individuals to incorporate and provide services as contractors in order to avoid the higher tax rate on corporate profits or individual income.

The plan would also repeal the estate tax on large estates/wealthy heirs, the domestic production deduction and other unspecified tax breaks for businesses, and would allow businesses to deduct or “expense” the value of their capital expenditures rather than depreciate those expenditures over time.  The framework also eliminates corporate taxes on offshore profits (this final component is not included in ITEP’s analysis but would overwhelmingly benefit those at the top).

Tax cuts for the wealthy would not trickle down to everyone else

This “Robin-Hood-in-reverse” approach to tax reform would cut federal revenue by $233.8 billion in 2018 and by $2.4 trillion over the next decade. This week, the U.S. Senate is marking up their budget resolution, which incorporates provisions to ease the way for the tax cuts. Specifically, these provisions would fast-track the cuts, allow an increase the national deficit by $1.5 trillion over 10 years and cover the rest through deep budget cuts to programs like Medicaid, Medicare and Social Security which help millions of low and middle-income Americans meet basic needs.

Despite the insistence that tax cuts for the wealthy and corporations improve economic growth and trickle down to everyone else, the evidence suggests the opposite would occur: by forcing budget cuts in programs that provide key supports for low- and middle-income people, tax cuts like these will deepen poverty and inequality in Kentucky and America.

Year-End Revenue Results Underscore Need for Right Actions on Tax Reform

Kentucky ended the 2017 fiscal year with $138.5 million less in General Fund revenue than economists predicted would be collected. The shortfall puts slightly more pressure on investments in our schools, universities and community colleges, health and human services and other building blocks of Kentucky communities. And its details reinforce the need to generate more revenue in ways that will work.

Total General Fund receipts in FY 2017 totaled $10.5 billion. Receipts did grow compared to FY 2016 by $138.9 million (1.3 percent), but the forecast predicted twice as much growth (2.7 percent). In general, year-over-year revenue growth is to be expected and has been the case historically in Kentucky, with total General Fund receipts growing 8 out of the last 10 years despite a major recession from which we’re still recovering.

A shortfall occurs when actual revenue does not meet the revenues estimated by the Consensus Forecasting Group. Those estimates are based on past revenue performance of the various taxes and fees levied by the commonwealth, and a review of general economic conditions in Kentucky and the nation. The estimates against which 2017 revenues are compared were made in late 2015. To put the shortfall in context, the amount actually generated is only 1.3 percent less than was predicted, which, given the length of time and number of factors considered, is pretty close. The governor has the ability to address the shortfall through a reduction plan that includes an already-ordered cut to agency spending of 1 percent, transfer of unspent funds and use of up to $59 million from the already-modest rainy day fund.

Even though the estimates were close and the deficit is not large, when considered in the context of Kentucky’s overall fiscal health, the shortfall underscores the inadequacy of our current tax structure to meet the needs of the commonwealth. We simply do not have the resources necessary to pay down the state’s unfunded pension liability, meaningfully respond to the opioid addiction or child protection crisis or recover from 16 rounds of budget cuts since 2007.

Kentucky’s main revenue sources – the individual income tax and the sales and use tax which comprise 41.9 percent and 33.2 percent, respectively, of total General Fund revenue in 2017 – both underperformed and contributed to the shortfall. The individual income tax was 0.4 percent below predictions and sales tax receipts were 1.5 percent lower than expected.

When comparing the overall strength of the individual income tax and the sales tax over time, it is important to note that since 2007, the individual income tax has grown by 44.5 percent while the sales tax has only grown 23.7 percent. The relative strength of the income tax showed up this year as well, as income tax receipts grew by 2.6 percent and generated $112 million more than the year before, while the sales tax grew by only 0.7 percent and generated $23 million more than 2016.

A major reason for the stronger growth in the income tax – which is more progressive (people with more income generally pay a larger share of their income in taxes than low- and middle-income people do) – is that it better aligns with the rapid income growth at the top in today’s increasingly unequal economy. The sales tax, on the other hand, asks more of middle and low-income people who have not seen their income or their purchasing power grow in decades. The sales tax also suffers from a relatively narrow base because it doesn’t generally apply to services, a faster growing sector of our economy.

Other revenue sources also contributed to lackluster overall growth in receipts: corporate income taxes, which are inherently volatile, fell 5.5 percent relative to 2016 and brought in 14.1 percent less than predicted. In fact, at $81.9 million less than was forecast, corporate income taxes were the largest nominal contributor to the shortfall. Factoring limited liability entity taxes (which businesses also pay) into corporate income taxes, these receipts grew by 1.8 percent compared to 2016 but underperformed estimates by 7.5 percent. Coal severance revenue fell for the 6th consecutive year to just a 1/3 of 2012 receipts, and cigarette taxes fell by 1.3 percent since last year.

Later this month, the state will close out the expenditure side of the budget and we will have an overall picture of where we stand fiscally. Later this year, in preparation for the 2018 budget session, the Consensus Forecasting Group will begin developing revenue estimates and agency heads will develop budget proposals for the 2018-2020 biennium. In addition to these processes moving forward, the governor has indicated that he plans to call a special session to address tax reform and pension reform – all further opportunities to examine Kentucky’s fiscal health.

As legislators consider the needs of the commonwealth and the ability of our tax code to generate sufficient revenues to meet them, the shortfall for 2017 should serve as a warning. Cutting income taxes for those at the top and shifting to heavier reliance on slower-growing sales taxes – which some Kentucky’s leaders are falsely promoting as a solution to not only budgetary but also economic woes – would deepen the fiscal challenges we face today. The real solution lies in cleaning up expensive special interest tax breaks that provide little to no benefit to the commonwealth. Real tax reform wouldn’t prevent shortfalls, but it would greatly improve the context in which they must be addressed.

Taxing Groceries in Kentucky Would Hurt Low-Income Families, Weaken Revenue Growth

Click to view as a PDF.

Governor Bevin has said he will propose tax reform in a special session this year that will move Kentucky toward a “consumption-based” tax system – in other words shifting from income taxes to greater reliance on sales taxes. One of the options for doing so would be to expand the state’s sales tax base to include groceries. But a tax shift package that includes groceries would make Kentucky’s tax system more upside-down – asking more of those with less – and would further reduce our lagging rate of revenue growth, putting needed investments in our communities at even greater risk.

Repeal of Grocery Exemption Would Ask More of Low-to-Middle Income Families

Since 1972, Kentucky has exempted food purchased for home consumption from the sales tax at an estimated cost of $700 million in fiscal year 2017. 1 Food purchased in restaurants and “to-go” and “take-out” items are taxed.

Reapplying the sales tax to groceries would be highly regressive, meaning it would cost people with low incomes a much larger share of their income than wealthier people. That’s the case for two reasons. First, sales taxes themselves are regressive. In Kentucky, the poorest 20 percent pay 5.5 percent of their income in sales and excise taxes, while the richest 1 percent pay only 0.8 percent. 2 The reason for this disparity is that people with less income, out of necessity, typically spend most or all of their income to make ends meet. Those with higher incomes are able to save a portion of their earnings – and those savings are not subject to sales taxes.

The second problem is that grocery taxes themselves are an especially regressive form of sales taxes. Rich or poor, everyone has to eat. Compared to other goods, there’s less a family can do – buying lower-priced items and less quantity – to cut grocery costs. Therefore, low-income families must devote a larger share of spending than those with higher incomes to meet this most basic need. Data from the Bureau of Labor Statistics’ annual Consumer Expenditure Survey show that food purchases for home consumption are a much larger share of total expenditures for the lowest income quintile than the top quintile (as shown in the graph below). 3 Also, it is notable that families in the lower income range spend a larger share of their total food budget on food to eat at home, while higher income households spend a larger share on eating meals out. 4

Source: Bureau of Labor Statistics.

Lower-income families therefore receive the most benefit from the exemption for groceries. Repealing it would disproportionately increase the share of income they pay in taxes, making Kentucky’s tax system more regressive than it already is. 5 The chart below from the Institute on Taxation and Economic Policy (ITEP), illustrating the estimated distributional impact of including groceries in the Kentucky sales tax base, shows that families in the bottom 20 percent would see their taxes increase as a share of income by 10 times more than families in the top 1 percent. 6

Source: Institute on Taxation and Economic Policy (ITEP).

ITEP’s distributional analysis accounts for the fact that if groceries are taxed, some purchases made by low-income families through SNAP (formerly known as food stamps) would continue to be tax-free, as required by federal law. The impact on low-income families remains large however, for a couple of reasons. To begin with, not all low-income people are eligible for SNAP and some who are eligible do not claim it. For those who do, benefits are based on a formula that still expects people to contribute a significant portion of their income to food purchases – and those purchases outside of SNAP would become taxable under a repeal of the grocery exemption. 7 SNAP benefits are not intended to fully cover a family’s basic diet, providing only about $1.40 per person, per meal. The tax increase for families in the bottom quintile from putting the sales tax back on groceries equals $118 a year on average. 8

Low- to middle-income families’ purchasing power is already being squeezed. Real wages for Kentucky workers in the bottom 30 percent are below where they were 15 years ago and wages at the median have grown by less than 1 percent. 9 Meanwhile, income at the top has soared. Tax changes that ask more of those for whom the economy is stagnant – such as an expansion of sales taxes to groceries – exacerbate this inequality. For families in the second lowest income quintile, a grocery tax would increase what they pay by $197 on average every year. For families in the middle-income quintile, they would pay $271 more.

It should also be noted that if a grocery tax were part of a tax package that decreases income taxes, the extent to which it would deepen disparities in Kentucky’s tax system is even worse than indicated above. Currently in Kentucky, the poorest 20 percent pay 1.2 percent of their incomes in personal income taxes while the richest 1 percent pay 5 percent. 10 A plan that taxes groceries in order to pay for a cut in income tax rates would be a massive redistribution of dollars from low- and middle-income Kentuckians to those at the top.

Combined with Income Tax Cuts, Repeal Would Worsen Kentucky’s Revenue Problems

Adding groceries to the sales tax base would also worsen the extent to which Kentucky’s revenue keeps up with growth in the economy. The reason groceries weaken the rate of revenue growth is that they have been declining as a share of household expenditures for decades. Food costs have declined dramatically relative to the cost of other goods, families eat out more than they used to and other purchases associated with a service-oriented economy make up a larger share of consumption. Between 1960 and 2016, food purchased for off-premises consumption has fallen from 18.9 percent of what Americans buy to only 7.2 percent. 11 Since grocery consumption is a shrinking part of the economy, expanding the sales tax base to include it would lower the overall rate of sales tax revenue growth. Especially if a grocery tax is enacted along with a reduction in much faster-growing income taxes, such a plan would worsen Kentucky’s ability to maintain public investments over the long term. 12

Additionally, if Kentucky were to repeal the grocery exemption, shopping patterns in border communities could be impacted. While research does not support the claim that significant numbers of people  relocate their entire lives to follow lower state income tax rates, it supports the concern that people who live in border areas – for instance in the greater Louisville and Cincinnati regions – would buy groceries across state lines. 13 Among our neighbors, Indiana, Ohio and West Virginia exempt groceries from sales taxes, with the rest taxing them at a lower rate than the general sales tax: Illinois at 1 percent; Missouri at 1.225 percent; Tennessee at 5 percent; and Virginia at 2.5 percent. 14  Changes in shopping patterns could reduce the anticipated state revenue from grocery sales taxes, as well as jobs in Kentucky and state and local revenue derived from Kentucky merchants’ income.

Kentucky Should Maintain Its Grocery Exemption

Of the 45 states that levy a sales tax, 31 exempt groceries from the base. For all the reasons this brief describes, the recent trend in state legislatures has been to reduce, rather than increase the sales tax on groceries. In our region alone over the last 20 years, Georgia, Louisiana, North Carolina, South Carolina and West Virginia have all exempted groceries from the sales tax; while Virginia, Tennessee and Arkansas have reduced their sales tax rates on groceries to below the general sales tax rate. 15

Taxing groceries won’t address the core problem with Kentucky’s tax system – that the revenue we have to invest in our communities is eroding relative to our economy. And the revenue a grocery tax would raise disproportionally impacts low-income families. Getting rid of special interest tax breaks for powerful interests and those with greater ability to pay is a better solution for Kentucky’s inadequate and upside-down tax system.

 

  1. Governor’s Office for Economic Analysis, “Commonwealth of Kentucky Tax Expenditure Analysis: Fiscal Years 2016-2018,” Office of the State Budget Director, http://osbd.ky.gov/Publications/Documents/Special%20Reports/Tax%20Expenditure%20Analysis%20Fiscal%20Years%202016-2018.pdf. This estimate includes the expenditures attributable to SNAP (formerly known as food stamp) purchases, which are exempt, and therefore overestimates the fiscal impact of a repeal. The Institute on Taxation and Economic Policy estimates a $588 million impact from eliminating the grocery exemption.
  2. Carl Davis, Kelly Davis, Matthew Gardner et al, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” 5th Edition, Institute on Taxation and Economic Policy, January 2015, http://www.itep.org/whopays/.
  3. Bureau of Labor Statistics, “Table 1101. Quintiles of income before taxes: annual expenditure means, shares, standard errors, and coefficients of variation,” Consumer Expenditure Survey, 2015, https://www.bls.gov/cex/2015/combined/quintile.pdf.
  4.  Bureau of Labor Statistics, “High-income households spent half of their food budget on food away from home in 2015,” TED: The Economics Daily, October 5, 2016, https://www.bls.gov/opub/ted/2016/high-income-households-spent-half-of-their-food-budget-on-food-away-from-home-in-2015.htm.
  5. Currently in Kentucky, the top 1 percent of families pay 6 percent of their income in state and local taxes while the poorest 20 percent pay 9 percent. Carl Davis, Kelly Davis, Matthew Gardner et al, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”
  6.  Some states that impose the sales tax on groceries attempt to address the disproportionate impact on low-income families by providing targeted income tax credits, usually in an amount that is much lower than what these families actually spend on groceries. Kentucky is better off maintaining its current exemption. In states that provide them, legislatures tend to let credits erode over time and even vote to cut them in times of fiscal strain. For instance, to help pay for income tax cuts for the wealthy in 2013, Kansas legislators voted to make their refundable credit for low-income families’ food purchases nonrefundable, which means that many low-income families with low or no income tax liability lost benefits.
  7. SNAP’s net income calculation includes a handful of deductions (standard, dependent, medical expenses and high housing costs) that reduce the base of the expected contribution calculation. Even though this adjustment reflects the limited income families have available for food purchases, SNAP benefits still do not make up the entire gap between what families can spend, and what they need to become food-secure. Research suggests that higher benefits would result in higher spending on groceries. Patricia Anderson and Kristin Butcher, “The relationships Among SNAP Benefits, Grocery Spending, Diet Quality, and the Adequacy of Low-Income Families’ Resources,” Center on Budget and Policy Priorities, June 14, 2016, http://www.cbpp.org/research/food-assistance/the-relationships-among-snap-benefits-grocery-spending-diet-quality-and-the.
  8.  The Center on Budget and Policy Priorities, “A Quick Guide to SNAP Eligibility and Benefits,” September 30, 2016, http://www.cbpp.org/research/a-quick-guide-to-snap-eligibility-and-benefits.
  9. Economic Policy Institute analysis of Current Population Survey data, using CPI-U-RS to adjust for inflation.
  10. Carl Davis, Kelly Davis, Matthew Gardner et al, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”
  11. KCEP analysis of Bureau of Economic Analysis personal consumption expenditure data.
  12.  Jason Bailey, “Will More Revenue from Tax Reform Be Real and Sustaining?” Kentucky Center for Economic Policy, February 9, 2017, http://kypolicy.org/will-revenue-tax-reform-real-sustaining/.
  13. Michael Mazerov, “State Taxes Have a Negligible Impact on Americans’ Interstate Moves,” Center on Budget and Policy Priorities, May 21, 2014, http://www.cbpp.org/research/state-budget-and-tax/state-taxes-have-a-negligible-impact-on-americans-interstate-moves. Mehmet Tosun and Mark Skidmore, “Cross-Border Shopping and the Sales Tax: A Reexamination of Food Purchases in West Virginia,” Working Paper 2005-07, Regional Research Institute, West Virginia University, http://rri.wvu.edu/wp-content/uploads/2012/11/Tosunwp2005-7.pdf.
  14. Eric Figueroa and Samantha Waxman, “Which States Tax the Sale of Food for Home Consumption in 2017?” Center on Budget and Policy Priorities, March 1, 2017, http://www.cbpp.org/research/state-budget-and-tax/which-states-tax-the-sale-of-food-for-home-consumption-in-2017.
  15. Nicholas Johnson and Iris J. Lav, “Should States Tax Food? Examining the Policy Issues and Options,” Center on Budget and Policy Priorities, May 1998, http://www.cbpp.org/sites/default/files/atoms/files/stfdtax98.pdf. Eric Figueroa and Samantha Waxman, “Which States Tax the Sale of Food for Home Consumption in 2017.”

SNAP Works and Shows Where Economic Progress Still Needed

The Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps, played a key role in helping cushion Kentucky’s economy from the depths of the Great Recession. It continues to be a critical lifeline and economic stimulus for people and parts of the state facing ongoing economic challenges.

SNAP is designed to automatically help boost the economy when it falters. More people become eligible for the program when jobs are lost and incomes decline. That feature both supports families during hard times and counteracts the economic drag of lower spending.

The recent history of SNAP in Kentucky makes this clear. Between 2008 and 2013 — as the Great Recession hit and its effects lingered — the number of Kentuckians receiving SNAP benefits increased by 221,000. But as the economy improved since then, the number of SNAP recipients fell by 25 percent and returned to its level before the recession hit.

Source: Cabinet for Health and Family Services.

Without SNAP kicking in, recessions would be deeper, longer and more painful. As the Center on Budget and Policy Priorities reports, “after unemployment insurance, SNAP is the most responsive federal program providing additional assistance during downturns.”

This role for SNAP also extends to economic problems that crop up at a local level. While SNAP enrollment has fallen across the state since 2013, the decline has been greater in counties experiencing a more robust recovery while the program has continued to play a larger role in counties facing economic barriers.

Twenty Kentucky counties, many of them in central and northern Kentucky, have had a greater than 30 percent decline in SNAP enrollment over the last three years, even while many of those counties have had growing populations overall. In contrast, 10 eastern Kentucky counties have seen SNAP enrollment decline by a more modest 15 percent or less. And a number of eastern Kentucky counties — including Letcher, Harlan, Perry, Knott, Floyd and Pike — have more people receiving SNAP now than in 2008, despite population loss over that time in those areas.


The loss of coal jobs in those counties beginning in 2012, and the ripple effect in communities, plays a big role in that difference. SNAP picked up some of the slack in local economies and ensured many families could meet basic needs. But the lag in those counties — on top of the longstanding high poverty rates that existed in those places already — underscores the serious need for other public investments to help create jobs and transition the economy.

SNAP does its job very well. In addition to economic stimulus, it protects families from hardship and hunger, reduces the depth of poverty, supports employment and has low error rates and administrative costs. Kentucky would have much to lose if Congress pursues changing the structure of SNAP to a block grant, which would make it unresponsive to economic conditions, or if the state creates barriers to access this vital program.

House Plan Unwinds Coverage Gains and Makes Harmful Changes to Medicaid Program

By several measures, Kentucky has been the nation’s biggest winner from the Affordable Care Act (ACA). Nearly seven years later, those gains and more are at risk in the recently released American Health Care Act (AHCA) – which not only fails to replace the ACA, but goes beyond it to restructure the Medicaid program in a way that will further reduce access to coverage and benefits. Together, these changes will rip health insurance away from 24 million Americans according to the Congressional Budget Office.

Proposal Unravels Medicaid Expansion and Restructures Medicaid to Shift Costs to States

Per-capita-caps = an end to Medicaid as we know it

The AHCA proposes a highly consequential change to Medicaid in the form of capping payments to a certain dollar amount per enrollee starting in 2019, and then adjusting for inflation (medical-related inflation to begin with, though that formula is vulnerable to cuts in future). Because Kentucky would be on the hook for all the costs above and beyond what the federal government provides, the state would have to choose between increasing its share of payments, cutting benefits, scaling back the number of people enrolled or cutting already too-low payments to hospitals, clinics and other kinds of providers. This funding method also doesn’t take into account spikes in costs due to things like new, expensive medications, outbreaks that are more expensive to treat like the opioid addiction crisis or the larger share of older patients as baby boomers begin requiring more costly care.

This squeezing of federal funding for Medicaid could restrict coverage for all Medicaid recipients — including kids, seniors and people with disabilities.

Unwinds Medicaid expansion by freezing enrollment and ending the enhanced federal match

The plan would freeze enrollment for the Medicaid expansion in 2020, which means no new people would be able to join the program after that point in time and be subsidized with the so-called enhanced “Federal Medical Assistance Percentage” (FMAP). The FMAP is the percent of Medicaid costs that the federal government pays. For Kentucky, traditional Medicaid is 70 percent paid for by the federal government and 30 percent paid for by the state. In contrast, for Medicaid expansion, the federal government pays an enhanced FMAP of 90 percent.

The federal government would still pay 90 percent of the cost for existing Medicaid enrollees, but that group would disappear as they cycle out of the program because of income or other eligibility changes. According to a report from the National Academy for State Health Policy, Kentucky saw 13,000 people cycle between Medicaid and marketplace coverage in 2014 because changes in their incomes made them eligible or ineligible for Medicaid. In the Medicaid program as a whole, 19 percent of Kentucky recipients covered in 2012 were no longer covered in 2013. The result is a death by attrition for expanded Medicaid in Kentucky.

The cost of paying for expanded Medicaid with the lower state matching rate is hefty — an earlier estimate put it at $712.7 million in 2019 for Kentucky above what we would otherwise pay with the enhanced match. It is extremely unlikely that our legislature would be willing to pick up that tab in future years.

Between reducing the enhanced federal match and freezing enrollment for the expansion as well as instituting a per-capita-cap across the board, the Congressional Budget Office estimates that 14 of the 24 million fewer people with coverage would come from reduced Medicaid enrollment. By comparison, a little over 11 million people gained coverage from expanded Medicaid since 2014.

Plan Threatens Private Insurance Market and Reduces Premium Assistance for Low-income and Older Kentuckians

Help for buying insurance based on age, not income

The new plan would still offer tax credits for helping people purchase insurance plans, but not based on income. Rather people would receive a tax credit between $2,000 and $4,000 based on age, ranging from 30-60 years old. This puts older, low-income Kentuckians at a significant disadvantage. As an example, a 60 year old earning $20,000 per year in Pike County would see a $6,410 decrease in her tax credit and a $6,000 decrease in Muhlenberg County under the AHCA compared to the ACA. The plan cuts credits for some low-income people even while people with incomes higher than what is eligible for subsidies under the ACA (up to $115,000) could get tax credits for purchasing insurance. And the credits don’t come close to covering the cost of insurance, particularly for older Kentuckians, who under this law could be charged up to five times as much as a young adult (compared to only three times more now).

The “continuous coverage” requirement would likely damage private insurance market

Under the AHCA plan, there is still a requirement for insurance companies that they cannot turn people away or charge exorbitant premiums for those with preexisting conditions; this is called “guaranteed issue.” At the same time, the plan removes the individual mandate that requires everyone have insurance – but the mandate is necessary to make guaranteed issue work without destabilizing insurance markets. The way the plan proposes to fix this problem is by introducing a “continuous coverage” requirement. This provision says that once enrolled you have to stay enrolled without a lapse of more than 63 days. If you do experience a gap in coverage for longer than 63 days, insurance companies would be able to increase premiums by 30 percent.

In practice, this creates incentives for healthy people to avoid the 30 percent penalty by not enrolling in coverage until they are ill, leaving sick people in the insurance pool and making insurance more expensive, which we’ve written about here. Ultimately, that can mean skyrocketing premiums, large drops in coverage and weaker coverage for insurance markets. The Congressional Budget Office estimates that there would be a decline of nine million people by 2026 between the employer-based and individually purchased insurance markets based on changes in the AHCA.

The AHCA Would Set Back Our Health and Economy

Fundamentally restructuring Medicaid, unwinding the Medicaid expansion that has provided coverage for 440,000 Kentuckians, reducing help for low-income and older Kentuckians to purchase insurance, and destabilizing private insurance markets are all reversals of the healthcare successes we’ve experienced as a Commonwealth. These damaging policy changes are being made in the AHCA to pay for large tax cuts for the wealthy and corporations in the bill. Another concerning consequence is that it scales back the lifespan of the Medicare Trust Fund, putting pressure on future lawmakers to further cut healthcare for seniors.

Kentucky has seen enormous gains because of the ACA. Our rate of uninsured has been cut dramatically, our providers have seen an 80 percent decrease in uncompensated care and low-income Kentuckians are already reporting better health. There are 1.3 million Kentuckians covered by Medicaid, and 130,000 who get insurance through the individual insurance market, all of whom are put at risk in some way by this plan. Lawmakers in Washington should reject this plan, and any other healthcare proposal that jeopardizes our health and our economy.

Updated March 14, 2017

Too Many Kentuckians Remain Underemployed

A close look at the employment level of Kentucky’s working age population shows more progress is needed to reach full economic recovery, as we recently noted. Another measure, called the underemployment rate, also shows there remain many Kentuckians who want more work than they are able to find.

Three groups of people make up the underemployment rate. The first is those classified as unemployed, meaning they are without a job but have looked for work in the past four weeks. The second group consists of “marginally attached workers,” meaning individuals who are not in the labor force but report they want to work, are available for employment and have looked for a job within the last year. And a third group is those who are working part-time for economic reasons, meaning they work less than 35 hours a week but report wanting to work full-time and being available for full-time employment.

In 2016, 9.7 percent of Kentucky’s labor force was underemployed, as shown in the graph below. While that number has improved substantially from the depths of the Great Recession, it is still above the 9.3 percent rate of 2007 and significantly above the 6.9 percent rate reached in 2000.

Source: Economic Policy Institute analysis of Current Population Survey data.

A still-high share of part-time workers who would rather be full-time is a piece of the problem. In 2016, 23.1 percent of Kentucky workers were part time, about the same share as the last few decades. But the percentage of part-time workers who report doing so for economic reasons remains elevated at 16.8 percent in 2016, as shown in the graph below (and no, this has nothing to do with the Affordable Care Act). In contrast, that share was only 14.7 percent in 2008 and as low as 9.2 percent in 2000.

Source: Economic Policy Institute analysis of Current Population Survey data.

These numbers remain elevated because Kentucky still lacks needed jobs, including full-time opportunities. Our situation begs for more policy efforts that spur additional job growth so we can get back to full employment, along with policies that improve job quality and remove barriers that keep people from obtaining work. We also need to guard against policies that, despite false promises, will make things worse or fail to create jobs. We outlined more about what to do, and what not to do, in our previous blog and here.

 

130,000 Kentuckians in Individual Market Would Lose Coverage from Health Reform Repeal

A partial repeal of the Affordable Care Act would likely result in close to half a million people becoming uninsured in Kentucky, including those who buy health coverage directly from an insurance company. According to the Urban Institute, 130,000 Kentuckians who are individually insured would lose coverage. Because the ACA requires everyone to have insurance or face a penalty, a larger, healthier and younger pool of plan-holders has made it possible for insurance companies to cover people who have conditions that make them more expensive to cover like asthma, diabetes, and even pregnancy. Repeal would undo that and create what’s called a “death spiral.”

Source: Urban Institute analysis using HIPSM 2016.

What Is a “Death Spiral?”

The Affordable Care Act (ACA) has been very successful in getting Kentuckians insured through the expansion of Medicaid and by offering subsidized insurance plans to low-income Kentuckians. Uninsured rates have also gone down thanks to the ACA ban on insurers denying coverage based on preexisting conditions and the requirement that everyone have insurance coverage or else face a penalty. These two provisions are related – it’s only with healthy, less medically expensive people gaining coverage that insurers could afford to cover sicker people with higher medical expenses. As a result of this relationship, removing the individual mandate, as well as the loss of federal subsidies for Qualified Health Plans through the marketplace, would trigger what is known as a “death spiral,” Here is how the death spiral would work:

 

Although some have claimed that the ACA is already in a death spiral, evidence has not shown this to be true. According to the American Academy of Actuaries and Standard & Poor’s, you would expect to see declining enrollment in the ACA marketplaces or continually escalating premiums. But nationally, marketplace enrollment has grown each year since 2014. And the sharp rise in insurance premiums this past year was a “one time pricing correction” not likely to be seen again in coming years.

As Kentuckians have taken advantage of federally subsidized Qualified Health Plans since 2014 through the ACA, the individual insurance policy market has expanded. Furthermore, because the share of employers offering insurance as a benefit has been falling — from 54.4 percent in 2012 to 47.8 percent in 2015 – there has been an increasing reliance on individual insurance policies.  More broadly the economy was nearing recovery in 2015 from the hit it took during the Great Recession. All of these factors combined so that people felt they could start buying insurance again. With repeal, that’s not likely to continue.

The ACA Repeal Would Hurt All Kentuckians

The ACA had a wide-ranging impact on the healthcare of Kentuckians. Besides the roughly half million Kentuckians enrolled in either the  Medicaid expansion or  Qualified Health Plans whose coverage would be jeopardized from a repeal of the Affordable Care Act, chaos in the individual insurance market, loss of patient protections and loss of billions in federal funding would be felt in every corner of the commonwealth. Even before Congress finalizes legislation to repeal parts of the law, President Trump can shock the healthcare sector, specifically the individual insurance market, through actions like the executive order he signed just after his inauguration. It did not detail what exactly what parts of the ACA would or wouldn’t be enforced, but that very ambiguity is enough to give insurers a second thought about participating in the individual market this coming year.

The complexity and interdependent nature of the law makes it nearly impossible to remove parts of it without causing damage to the whole healthcare system, including people who buy insurance individually. This is not the time to move backward on the gains we’ve realized as a commonwealth. Congress can and should improve on the ACA, so that more Kentuckians have quality, affordable healthcare. Instead it is tilting full steam toward repeal.

 

Testimony for Congressman Yarmuth’s ACA Repeal Forum

Click to view as a PDF.

Intro:

Good afternoon, my name is Dustin Pugel and I’m a research and policy associate with the Kentucky Center for Economic Policy, a think tank that seeks to improve the quality of life for all Kentuckians through better public policies.

Communities thrive when they have a strong foundation made up of things like good education, safe streets, and affordable, quality healthcare. The Affordable Care Act (ACA) has empowered Kentucky to bring healthcare to half a million of our most vulnerable, protect ourselves from harmful insurance practices, strengthen our healthcare system and boost our economy. There are so many reasons not to move backward on the progress we’ve made.

I want to briefly run down what experts believe a repeal of the ACA would mean for the commonwealth. Many people forget, but it was originally called the “Patient Protection and Affordable Care Act,” so I think it’s helpful to talk about what repeal would mean in these terms:

  • What kinds of affordable care are in jeopardy,
  • What patient protections are poised to be lost,
  • And finally, how those changes will hurt our economy, jobs and state budget.

Affordable Care:

In considering a repeal’s effect on affordable care, first and foremost, an estimated 486,000 Kentuckians would lose insurance coverage. That loss of insurance coverage is a tripling of the number of uninsured in Kentucky. This decline would come from people losing Medicaid and federal insurance subsidies, people no longer being required to be insured (known as the individual mandate) and the individual insurance market entering into what is called a death spiral.

Because a repeal would disproportionately harm states that expanded Medicaid and saw large decreases in their uninsured, Kentucky is among the states with the most to lose. In fact, we would have the third largest increase in the rate of uninsured in the country.

These same plans to repeal would also result in a huge decline in 2019 federal spending in the commonwealth on Medicaid expansion and insurance policy subsidies. Between 2019 and 2028 Kentucky would receive nearly $50 billion less in federal dollars. This federal money injected into our economy has resulted in large employment gains in the healthcare sector and steep declines in the amount of money healthcare providers spend on uninsured patients, called charity or uncompensated care. Nationally, the Urban Institute expects there to be a $1.1 trillion increase in demand for uncompensated care between 2019 and 2028 if repeal moves forward.

Patient Protections:

When it comes to the protections we would lose as Kentuckians, the healthcare reform law is expansive and complex, but a few critical protections stand out, such as:

1.9 million privately insured Kentuckians as well as 863,000 seniors on Medicare could lose free preventative care like immunizations, blood pressure screenings and cancer screenings.

1.4 million Kentuckians, including children, could see caps placed on the amount an insurer would spend over each person’s lifetime, or even each year — cutting off coverage for the sickest individuals when they most need it.

Women could be charged premiums as high as 57 percent more than men.

All insured Kentuckians could lose protection from being overcharged by insurance companies. Since the ACA was passed, companies have refunded Kentuckians $33.3 million that weren’t needed for administration or care.

The ACA also included a provision that corrects a glitch in Medicare prescription coverage that led to some prescription drugs becoming too expensive. But an ACA repeal would mean disabled and older Kentuckians would pay more for prescription drugs, or else forgo them entirely. The average savings for affected Kentuckians was $1,108 per person in 2015 alone.

One especially popular part of the law is the requirement that insurers not deny coverage to someone with a preexisting condition. One of the biggest problems lawmakers will encounter when attempting to repeal the ACA is that the preexisting conditions provision creates a double bind.

On the one hand, if it is repealed, 1.9 million Kentuckians with conditions like asthma, diabetes, cancer and even pregnancy could see their premiums dramatically increase, or simply be denied insurance coverage all together. On the other hand, if the preexisting coverage protection stays, but the individual mandate is repealed, then insurers will be left with expensive, sick enrollees, while the healthy, inexpensive enrollees leave the market. The end result is what’s called a death spiral, when insurers have to increase costs, so more people pull out because they can’t afford it, until insurance companies decide not to offer individual plans anymore. This would be devastating for the hundreds of thousands of Kentuckians who buy insurance directly from an insurance company.

Economic Ripples:

The billions of federal dollars that have been pumped into Kentucky have had a major impact on our economy. If repeal moves forward and that money suddenly evaporates, every part of the state will feel it.

According to the Commonwealth Fund, of the 45,000 jobs that would be lost in 2019 because of repeal, 38 percent would be in the healthcare sector. The rest would come from construction, real estate, retail, finance and other industries.

Over five years beginning in 2019, Kentucky’s business output would lose nearly $41 billion in value in addition to $24 billion less in federal spending. With such a dramatic drop in our state’s economic activity, the state would see $718 million less in revenue in the midst of a health crisis and a massive pension liability that has already pushed lawmakers to undermine critical state services.

ACA repeal would wreak havoc on Kentucky:

The Affordable Care Act has been a lifeline to Kentuckians who either gained healthcare coverage through the Medicaid expansion and insurance subsidies, or have been protected from harmful practices banned by provisions in the law. Our economy has benefitted from a large influx in federal funds that have boosted job growth and invigorated local economies.

Instead of building on these successes, repealing the ACA would wreak havoc on our healthcare system and reverberate throughout the commonwealth. People would be left without access to needed treatment, healthcare providers would see their revenues shrink and potentially lead them to close their doors, and state government would be forced to further cut vital services as it deals with a smaller state coffer. Congress can and should improve on the ACA, and any public healthcare program, so that more Kentuckians have quality, affordable healthcare, but instead it is tilting full steam toward repeal. Kentucky’s representatives in Washington should be aware of the damage that would cause back home.