On July 25, the extra $600 per week in unemployment benefits known as Federal Pandemic Unemployment Compensation (PUC) expired for Kentuckians receiving jobless benefits, and the pain of that lost income is already being felt. Over the last several months, the $600 has helped to sustain consumer spending, prop up the state budget and enable hundreds of thousands of out-of-work Kentuckians to make ends meet amidst deep job loss and a worsening public health crisis. Unless the U. S. Senate agrees to extend the $600/week benefit, the economic damage of the recession will be much deeper, the eventual recovery will take much longer and more Kentuckians will be unable to afford basic necessities.

The extra $600 provided a major boost to a slowing economy

From PUC payments coming into the state, Kentucky has received over $100 million a week since late March for a total of $2.9 billion in federally-funded benefits. These federal dollars are a significant boost to the economy, as every dollar provided through unemployment insurance during a downturn generates as much as $2 in the broader economy as the monies are spent at grocery stores, for rent and utilities and at other businesses.

But with the expiration of $600 three weeks ago, and the loss of 2/3 the value of unemployment benefits for the average claimant, Kentucky consumer spending is likely to contract. In fact this may already be happening. After a return to spending levels similar to January that corresponded with the PUC and Economic Impact Payments (known as “stimulus checks”), spending already began to decline in June, and accelerated at the end of July, so that as of August 2 consumer spending was down 4.8% compared to January.

Lower consumer spending also leads to fewer jobs. A reduction in demand and therefore lower consumer spending means there isn’t as much income going to those who make and sell goods and services – which eventually will lead to additional layoffs. According to one estimate, the result of losing PUC alone could cost Kentucky nearly 50,000 jobs, or 2.6% of the workforce.

The extra $600 benefit also significantly buoyed tax revenues, staving off what could have been a disastrous end of the 2020 state fiscal year (SFY). The fourth quarter of SFY 2020 (April through June) showed a 1.0% increase in withholding income tax receipts, but when withholdings from unemployment insurance are not accounted for, withholding receipts drop to -5.5% compared to the year before. That trend continued into July, when individual income tax receipts grew 6.2%, with $20.4 million coming from unemployment check withholdings. State budget officials also credit PUC with keeping sales tax receipts from cratering in July, and actually contributing to growth of 12.3% that month. With those benefits gone, and consumer spending slipping, Kentucky’s budget will no longer be propped up as it has the past few months.

Kentuckians face new turmoil after the expiration of the $600

Meanwhile, the hardship of losing PUC is already being felt by Kentuckians across the commonwealth. According to the Urban Institute, by not extending PUC through the end of the year, 51,000 more Kentuckians will live below the poverty line ($26,200 for a family of four). To get a snapshot of what this means in real terms for people, KCEP began collecting stories on August 9 from people who have either used the $600 PUC benefit, or know someone who has. A selection of those stories illustrate what the loss of 2/3 of income looks like:

It [PUC] bought my groceries and helped me pay my bills and buy things my children needed. [Without PUC] I don’t know how I’m going to pay my bills from this point on. I’m at high risk for getting COVID so I can’t return back to work and my kids can’t return to school. 
Jessica from Hardin County

It has helped pay bills and keep food on the table for my family. We live in eastern KY and jobs are always hard to come by, especially now. What we draw on unemployment [without PUC] won’t even pay half of our bills.
Beth from Morgan County

I only get $69 from state [unemployment] benefits. Without [PUC] I can’t live literally. I’ve got a 1 year old, rent, car payment and other bills plus a fiance with brain damage who gets no kind of assistance! [Without PUC] we may be homeless, I may lose my car, my child could possibly go without diapers. 
Melissa from Jefferson County

I am currently back to work, but my place of employment plans to lay me off again for 6-8 weeks.  With regular unemployment, my family will not be able to pay our bills. We have just gotten to where we were building credit and getting ready to buy a new home.  If I am laid off and do not receive that extra money then our credit could start deteriorating again and we will not be able to provide for our children the same.  
Amber from Allen County

It’s helped me do much needed repairs to my home. I won’t be able to survive on the 80 [dollars] a week. 
Donna from Jefferson County

[Not having PUC is] a major loss. I was able to pay up my bills for this month of August. But after August if it doesn’t get renewed or something else comes through, my son and I are really going to have issues. I haven’t even been able to help him with getting school supplies. It wasn’t my fault I got laid off and the second I can go back to work I will. 
Megan from Nelson County

It will surely hurt me seeing as that is/was the majority of my monthly income needed to pay bills and buy groceries and to help make sure my 3 month old son has what he needs, too. If I can’t receive those funds it will become very hard and very stressful to be able to do these things!! Without the 600 dollar benefit there are going to be many Kentuckians and others around the country that are going to have a hard time being able to get the things needed for their families to survive because the money from regular unemployment just isn’t enough to cut the mustard!!
Brian from Powell County

Before the Pandemic I worked for the company for 12 years. I was earning $1100 weekly. With the help of the $600 I was able to pay my utilities and my mortgage. Now without the extra I will only be drawing $352 every 2 weeks. I will not be able to pay my mortgage, therefore I will lose my home. My husband has leukemia so it is [a] scary time for us. 
Crystal from Madison County

I was able to make mortgage payments, feed my child, keep lights [and] water on. [Without PUC] I have lost my car and [am] facing notices from [the] energy company – hard to maintain a family on $289.
Kristina from Northern Kentucky

[Without PUC] I’m about to lose everything I’ve worked hard for.
William from Grant County

Only Congressional action can save the $600 and sustain the economy

Tying enhanced benefits to an arbitrary end date (July 25) has left nearly 200,000 Kentuckians financially stranded. The $600 a week should be extended – at the very least – through the end of January as was proposed in the U.S. House-passed HEROES Act, and ideally triggered to automatically continue if needed beyond that point. Extending the $600 should also be part of a broader emergency aid package that extends the eviction moratorium and includes housing assistance, provides substantial aid to state and local governments, expands food assistance, and much more.

The U. S. Senate-proposed HEALS Act and the President’s recent executive actions fall far short of what’s needed. Both would cut the $600 substantially even while the pandemic has resurged and unemployment remains historically high. The President’s actions also may be illegal and administratively unworkable. Even if those actions can go forward in some form, they leave out significant numbers of low-wage unemployed workers and will expire in 5-6 weeks. And both the Senate proposal and the President’s actions ignore the other forms of aid that are critical to sustaining the economy and families through this crisis.

Extending the $600 would help alleviate immediate harm being caused to Kentucky families, our economy and our state budget. Leaving stranded Kentuckians without meaningful help is not an acceptable option, and the U.S. Senate needs to act now.

Note: Stories about PUC were edited only for spelling and punctuation.

As with states, local governments in Kentucky and nationwide need significant federal relief if they are to continue providing crucial front line and community services through the COVID-19 pandemic. Measures preventing the spread of COVID-19 are deeply suppressing the economic activity that fuels local revenue receipts, and the significant impact on cities and counties is expected to continue over several years. Much more federal aid – as is proposed in the recently introduced HEROES Act – is needed to prevent painful cuts and avoid lengthening and deepening the economic downturn.

Kentucky cities face huge collective deficit this and next year

Earlier this month, the Kentucky League of Cities (KLC) conducted a survey of its members, with results suggesting cities will face a collective budget shortfall of $85 million in the current fiscal year ending June 30, and $180 million in fiscal year 2021. Because local governments are required to balance their budgets every year, face restrictions on issuing debt and have limited ability to levy taxes – and because the state faces its own devastating shortfall, meaning adequate state aid to locals is off the table – without federal help, local governments will be forced to make significant cuts. Reducing police, fire, EMT, social services, public works and other crucial services harms communities during good times. Such cuts will be devastating during the pandemic, including because they create an additional drag on local economies from layoffs and reduced investment.

Many communities in Kentucky face a particularly precarious situation

Before COVID-19, many of the local governments in eastern Kentucky were already struggling financially due to a loss of coal severance funds, significant reductions in property tax bases and increasing pension and jail costs. But even communities that have seen comparatively strong economic growth in recent years are at risk. Data from Brookings identifies Louisville, Lexington and Bowling Green among the U.S. cities that could be most harmed fiscally by COVID-19 job losses and business closures due to their mix of industries and revenue sources.

Shortfalls and cuts that have already been announced by local governments to date include the following:

• Pike County Judge Executive Ray Jones announced $1.4 million in staff reductions – a total of 28 employees.
• Lexington Mayor Linda Gorton announced a projected decrease in revenues of $40 million for the upcoming fiscal year, which represents an overall decrease of 10% in General Fund revenues for the city. Lexington derives 60-65% of its revenues from the occupational tax and the business gross receipts tax.
• Louisville Mayor Greg Fischer expects a $46 million shortfall in the current year and a $69 million shortfall in fiscal year 2021. Overall, 47% of city tax revenues comes from the occupational tax and 11% from business profits taxes. Louisville received $134 million from the CARES Act to use for direct COVID-19 expenses.

Covid-19 relief for local governments in Kentucky so far is extremely limited, but HEROES Act provides more

Given the projected magnitude of local revenue shortfalls, the limited federal assistance provided thus far is inadequate. The state of Kentucky will receive approximately $1.7 billion from the CARES Act but the only local government large enough to receive a direct allocation is Louisville. Any additional relief to local governments must come from the $1.599 billion Coronavirus Relief Fund the state received, and Governor Beshear announced on May 20 that local governments will receive $300 million from that fund. But that amount is not enough, and those funds are restricted in use for pandemic-related expenses and cannot be used to address revenue shortfalls.

On May 15, the $3 trillion HEROES Act passed the House, with over $1 trillion in flexible relief for state and local governments to be distributed over the next year. Of that amount, $375 billion would be allocated to local governments. Those monies would be allocated to Kentucky localities as follows:

Counties and cities need this kind of direct, flexible aid and they need it to continue until their economies have fully recovered.

As the COVID-19 pandemic leads to layoffs and school closures, and as more people are staying at home to reduce the risk of infection, having enough food will be an increasing challenge. Public benefit programs providing nutrition assistance will be a key intervention in prioritizing family well-being and economic stimulus.

The federal Families First Act is a good start but action is still needed to expand nutrition benefits for low-income families. And while the state has already enacted a number of measures to minimize barriers to nutrition assistance, more can be done to ensure that people who already participate can continue to benefit and that people now facing food insecurity as a result of the pandemic can more easily access assistance.

Nutrition support is an essential component of COVID-19 response

Programs like the Supplemental Nutrition Assistance Program (SNAP) and the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) will help address the food insecurity that results from COVID-related layoffs, reduced income and physical distance from institutions like schools and senior centers that provide meals. But these programs are also essential to mitigate the negative health impacts of the crisis.

For instance, research is clear that SNAP improves health among participants. With Kentucky being the 6th most at-risk state for adults becoming seriously ill if infected due to already poor health, food security is a critical policy priority. This is particularly true for seniors who are also at much higher risk of serious illness if they are infected with COVID-19. Furthermore, these programs boost family food budgets and free up income for meeting other basic needs. SNAP benefits are quickly spent in the local economy, making them one of the most efficient mechanisms for economic stimulus in a downturn.

Recent federal legislation will help feed Kentuckians, but needs improvement

The second COVID-19 relief bill, the Families First Coronavirus Response Act, provides several supports and flexibilities for states to address the growing number of food insecure individuals and families during this public health crisis.

The new law provides emergency additional benefits to some SNAP households. However, rather than a much-needed blanket increase for all SNAP households, this provision fails to increase benefits to households with the lowest incomes who currently already receive the maximum benefit. The USDA should reconsider their interpretation of the emergency funds in order to increase SNAP benefit levels by an across-the-board 15% increase to the maximum benefit instead. Congress could also temporarily increase the federal share of the cost of administering benefits, which is currently 50%. This would help free up diminished state resources and provide relief to the Department for Community Based Services (DCBS).

Another support provided in the Families First Act is Pandemic EBT, which provides additional benefits to households with children whose schools have closed. Estimated at $114 a month per child, the benefit is for children who participate in free or reduced price meals at school – 528,100 children in Kentucky – regardless of whether they were previously enrolled in SNAP. In order to disseminate benefits, DCBS and the Kentucky Department of Education (KDE) will need to determine a process to get EBT cards to students who receive free and reduced price lunches but are not SNAP participants.

Additionally, not all of the 239,000 Kentucky children on SNAP receive free and reduced lunches. That means despite being food insecure they would not be eligible for Pandemic EBT. The USDA should allow all school-aged children to be eligible for these benefits and allow states to consider SNAP households – 113,000 in Kentucky –  automatically eligible for the Pandemic EBT program. This would make the dissemination of emergency benefits more efficient and ensure no households with children fall through the cracks, leaving their families with fewer food resources when they need it the most.

Given the widespread business closures and layoffs in recent weeks, a particularly important component of the Families First Act is its waiver of existing work reporting requirements for adults under 50 without children in their homes. This change also has the effect of delaying the implementation of a new USDA rule that restricts states’ ability to waive work reporting requirements in areas where there are insufficient jobs.

The new law also provides several administrative flexibilities to states including the extension of certification periods, simplified application processes and reduced paperwork. These changes remove administrative barriers to continued participation in SNAP – which is both helpful for state workers who will soon face a spike in caseloads and also for individuals who won’t have to face as many hurdles to receiving food assistance.

The federal Families First Act creates the infrastructure to begin meeting the huge increase in need for food during this pandemic. Given the depth of the economic downturn and the unique power of SNAP to improve health, combat poverty and activate local economies, additional steps must be taken by the federal government in the next relief bill to utilize the full capacity of SNAP to stimulate the economy. A SNAP-based stimulus strategy was used in the Recovery Act that effectively prevented larger poverty increases and helped the economy during the Great Recession. It is essential that the next federal legislative package include a temporary increase to SNAP benefits to allow families to meet nutrition needs now and to boost the economy as we recover.

Kentucky must continue to act strategically and quickly to minimize COVID-19-related food insecurity

Governor Beshear has taken a number of appropriate actions to promote social distancing and minimize transmission of COVID-19, including the closure of public and private schools, senior centers, restaurants and non-essential retailers across Kentucky. Unavoidably, continued closures and growing economic hardship are creating new barriers to ensuring that Kentuckians, especially children and seniors who previously relied on school and senior nutrition programs, get the food they need.

Kentucky’s DCBS has already publically exercised some flexible authority to mitigate transmission of COVID-19 and make it easier for people to access food through SNAP. These actions include:

• Implementing Guidance for Limiting In-person Services at Family Support Offices.
• Before it became federal law in the Families First Act, the state waived work reporting requirements for all adults without a disability or children.
• Extended 3-month certification periods for all public assistance programs (SNAP, KTAP, CCAP, Medicaid, and State Supplementation) so that people who are currently enrolled stay enrolled for longer without facing barriers including in-person meetings.
• Extended call center times and phone line capacity.
• Allowed self-attested statements from applicants to verify income eligibility.

Additionally, KDE has requested and received a Summer Meals Non-Congregate Feeding waiver while schools are closed to provide meals to students who were receiving free and reduced price meals at school, and has expanded pick-up locations across the state. The Department of Public Health’s WIC program has received a Physical Presence waiver to minimize in-person visits and to postpone lab work requirements to receive WIC benefits and a waiver to issue benefits remotely. Senior nutrition programs have created community plans, like Louisville’s Senior March for Meals, to continue and expand meal deliveries for the seniors that need it the most.

Kentucky’s nutrition assistance programs can go even further and provide more administrative simplifications to make it easier for the Cabinet for Health and Family Services to get benefits to people who need them. For example in the SNAP program, the state could:

• Waive any periodic reporting requirements and extend certification periods to the maximum available (24 months for seniors and persons with disabilities and 12 for all other households) so that people don’t face re-enrollment related barriers to continuous nutrition support.
• Create flexibility within required federal reporting, known as Quality Control Interviews, by opting to replace face-to-face interviews with telephone interviews and accepting the optional 45 day extension made allowable by the USDA.
• Eliminate bans on SNAP participation for people behind on child support payment or who were previously convicted of a drug-related felony.

Similarly, with regard to the WIC program, the state can request a waiver to extend all certification periods for up to six months; provide 30 days of temporary WIC benefits to eligible families who do not have all their documentation during their enrollment appointment; minimize re-authorization requirements for WIC-participating retailers; and provide flexibility with nutrition requirements to replace hard-to-find WIC-approved items with similar products.

Action has being taken, but much more can and should be done to meet the needs of people who will increasingly struggle to put food on the table during this pandemic.

Amid the spread of COVID-19 and resulting business closures and layoffs, a recession is under way and could be particularly harmful in Kentucky due to the state’s failure to adequately prepare. Kentucky is among the 12 states least prepared for America’s next recession, according to a new report from the Center on Budget and Policy Priorities.

Kentuckians with low incomes and people of color are especially at risk of COVID-19, job losses, wage cuts, lapses in health care coverage and other resulting hardships. As a result, state responses – in addition to the essential federal ones – will be critical in the weeks and months ahead.

According to the report, people in states with inadequate budget reserves, weak unemployment insurance systems, relatively inaccessible Medicaid programs and/or unaffordable public higher education systems are particularly likely to struggle during the next recession.

Kentucky ranks in the bottom 10 for two out of four of these measures of recession preparedness: ensuring there are adequate reserves in the state’s rainy day fund and providing affordable public colleges and universities. Kentucky ranks poorly in terms of its unemployment insurance (UI) system as well, though pending state action on Senate Bill 150 (SB 150) as amended by committee substitute – an emergency response to the COVID-19 pandemic that will allow more Kentuckians to receive unemployment insurance benefits – would help.

Inadequate reserves in the “rainy day fund”

States generally build up reserves in good times to prepare for recessions and avoid cuts to essential services. State reserves will be particularly important as the economic downturn results in less state revenue and as expenses go up for programs like Medicaid.

However, Kentucky has one of the lowest Budget Reserve Trust Funds (often called “rainy day funds”) in the nation, at 3% of General Fund Expenditures in fiscal year 2020. The median state rainy day fund across the country was at 11.1% as of 2018. And according to the Center on Budget and Policy Priorities report, states should aim for reserves equaling 15% or more of their budgets — as 14 states currently do. According to an economic “stress testing” analysis by Moody’s Analytics, Kentucky ranks 48th among states when it comes to rainy day fund preparedness.

During economic expansions, states advisably replenish their rainy day funds. However, over much of the last decade, Kentucky has too often chosen tax cuts for corporations and the wealthy instead of restoring deep budget cuts stemming from the Great Recession and increasing the rainy day fund balance.

Weak unemployment insurance system

Having a robust UI system is crucial during recessions because it helps individuals who have lost jobs (or in states with important “work sharing” programs, those who have had hours cut back) to afford basic needs. States’ UI systems vary considerably due to their discretion over benefit levels, eligibility rules, tax levels and other program aspects.

Kentucky’s UI program is not as strong as it needs to be, ranking 36th in the nation in the share of people who are jobless who actually receive benefits – the “recipiency rate.” In addition, Kentucky has not enacted any of seven modernization policies recommended by experts for UI including expanding the alternative base period (ABP), which 41 states have already done.

Currently in Kentucky, to determine if an unemployed worker has earned enough to qualify for UI benefits, their earnings from the first four of the previous five quarters of work (prior to filing for benefits) are considered. This leaves out many part-time, low-wage and seasonal workers who may have had higher earnings in the previous quarter (the “lag quarter”), or the quarter in which they applied (the “filing quarter”) than earlier in the year. By one estimate, not having an ABP leaves out 1 in 5 workers, but adopting it only increases the overall UI payouts by 4-6%. As restaurants and bars close, and as a slowing economy reduces seasonal work like construction, adopting an ABP is a critical improvement needed for Kentucky’s UI program.

SB 150 would give the Governor authority to use administrative actions to adopt the ABP and work sharing along with waiving work searching requirements and the seven-day waiting period for benefits, among other ways to support workers.

Barriers to health coverage through Medicaid and KCHIP

During an economic decline, more people must rely on Medicaid and/or the Children’s Health Insurance Program (CHIP and in Kentucky, KCHIP) due to the loss of their employer health coverage. States should make enrolling in Medicaid and CHIP as simple as possible, so people can continue to receive needed health care services and avoid becoming uninsured.

Compared to other states, Kentucky has a relatively accessible Medicaid program thanks to the Medicaid expansion and two federal court rejections of the Bevin administration’s attempts to add work reporting requirements as well as Governor Beshear’s recent rescission of the proposed requirements. However, the report notes than Kentucky does have barriers in place for accessing Medicaid needing removed: disruptions in coverage for children instead of 12-months continuous eligibility for KCHIP, and cost sharing for non-disabled adults (though, co-pays have recently been made optional by an emergency regulation related to the COVID-19 pandemic). Cost sharing, even when the amount required is very small, can keep people from accessing care and has a negative effect on health outcomes. These barriers are even harder to overcome during a recession, when household incomes are lower.

Unaffordable colleges and universities

People enroll in colleges and universities to boost their skills and training when the economy is weak, helping them and state economies through increased productivity in the long term. Yet states vary considerably in how much they invest in higher education.

Kentucky’s investment in its public community colleges and universities has been declining since the last recession, a 35% cut once inflation is taken into account, which has led higher education institutions to raise tuition in order to make up for some of their losses — shifting higher education costs from the state to students.

These rising costs make up a growing share of Kentuckians’ income. A report out last year ranked the state 8th worst in college affordability, measured as the average net price at a 4-year public university as a share of median household income — which in Kentucky is 30%. Kentucky was one of 17 states in 2017 where black households would need to spend at least 40% of their incomes to get a degree. The net price represented 34% of Hispanic/Latino median household incomes compared to 29% for white households.

As described, Kentucky can improve access to Medicaid and UI before the recession reaches its depths. In the longer term, raising revenue through cleaning up tax breaks would allow us to reinvest in higher education and other critical public services.

But in the current crisis, Kentucky and other states will need federal aid to keep essential functions of government running, respond adequately to COVID-19, meet the needs of people across the commonwealth and prevent further harm to the economy. Kentucky will receive some assistance in paying for Medicaid in the Families First Act that has passed Congress, but needs much more aggressive aid in the next package.

The budget passed by the House mostly avoids another round of damaging cuts to programs and services that have been common since the Great Recession (with a few important exceptions, like the elimination of direct aid to libraries). However, because it is based on the worst revenue forecast in 25 years and is not accompanied by significant revenue raisers, there simply isn’t enough revenue to support the level of investment necessary to move the commonwealth forward.

Furthermore, there will likely be additional fiscal strain in Kentucky related to the quickly escalating COVID-19 pandemic, including the increased risk of a recession. Kentucky’s rainy day fund will be only 3.3% of revenue under the House budget two years from now, one of the poorest-funded in the country; the median state rainy day fund was at 11.1% of revenue as of 2018.

As the Senate advances its proposal and negotiations across chambers take place to work out differences, all revenue options should be carefully and seriously considered, no new tax breaks should be passed, and measures should be put into place that protect investments going forward.

One: Pass revenue raising measures   

New revenue is necessary. In a comprehensive budget preview published in January, we documented the impact of more than a decade of budget cuts on schools, college affordability, child protective services, supports for Kentuckians with disabilities and more. These challenges have been described at length in budget review subcommittee meetings over the last couple of months. [i] In addition, the likely additional strains on the public health system and on public services more broadly due to coronavirus and the subsequent economic fallout, and the likelihood of less revenue coming in as a result, heightens the need for action.

Given the short time left in the session, and the lack of movement on comprehensive proposals that would raise adequate revenue to robustly address these challenges, at a minimum the legislature should act on several bills and ideas that have been introduced that would generate much-needed revenue and add other commonsense ideas.

• Address the under-taxation of “instant racing” slot machines and advanced deposit account wagering – HB 607, filed by Representative King, imposes a 1.5% surtax on the rapidly-proliferating “instant racing” slot machines and a 2.5% surtax on wagers made through advanced deposit account wagering (ADW), with all proceeds from the surtaxes being deposited in the General Fund. These two forms of betting are growing quickly, and the current tax rates are very low compared to other states and to wagering at a comparable level in Kentucky. In addition, a majority of the revenues from the taxes imposed on both forms of betting are funneled back to the industry to support breeding and purses. The state racing commission has approved the installation of close to 10,000 new machines across the state over the next few years, presenting significant new opportunities to generate revenues for our General Fund while continuing to provide strong support for the horse industry. If passed, HB 607 could generate $60-80 million in new revenues annually for the General Fund, with likely additional growth as more machines are placed in service. HB 607 has been referred to the Licensing, Occupations, and Administrative Regulations Committee.
• Increase the tax on other tobacco products, including vaping, to match the cigarette tax increase passed in 2018 – HB 32, introduced by Representative Miller, increases the tax imposed against tobacco products other than cigarettes, including vaping products, to a level comparable to the cigarette tax increase enacted in 2018. Historically, taxes on all forms of tobacco have been increased simultaneously. However, that did not happen in 2018 and this proposal remedies that. The LRC fiscal note projects new revenues of $22.6 million in fiscal year 2021 and $27.3 million in fiscal year 2022 from this proposal, and the House assumes these revenues in the budget that it passed last week. The proposal has passed the House and has been referred to the Senate Appropriations and Revenue Committee for consideration.
• Raise the cigarette tax – The governor included an increase in Kentucky’s low cigarette tax in his budget proposal. Increasing the tax makes sense as a health measure to help deter youth smoking and will help in the short term as a temporary revenue raising measure. Kentucky’s $1.10 per pack is 36^th among states and below the national average of $1.81 per pack. The governor proposed increasing it by 10 cents a pack, but as long as the state is raising the tax it should do so by at least 50 cents, which would raise approximately $100 million. Raising the cigarette tax rate by 50 cents and the other tobacco tax rate commensurate would generate additional revenue.
• Regulate and tax sports betting and fantasy sports – Although it will not raise much revenue, HB 137, sponsored by Representative Koenig, will regulate and tax activities that residents of Kentucky already engage in through programs and opportunities available in other states. This bill passed out of committee in the House, and is on the floor for consideration by the entire body with 18 floor amendments filed. If passed, revenues from this proposal are likely to be less than $10 million annually due to market saturation and the limited deployment of sports betting (no fiscal note exists on the bill).
• Provide additional support for state parks infrastructure – HB 601, sponsored by Representative Donohue, imposes a 1% surtax on the existing 1% transient room tax. This would provide a much-needed, consistent funding source to support state parks infrastructure. Based on receipts from the existing tax, this levy could generate up to $14 million a year. The bill has been referred to the House Appropriations and Revenue Committee.
• Require federally documented vessels to register in Kentucky – Under current law, boats that are federally documented are not required to register separately in Kentucky, making the payment of required annual property taxes on these boats difficult to enforce. HB 418, filed by Representative Tipton, would require federally documented vessels to be registered in Kentucky. This bill will likely not raise much new revenue, but it will treat all boat owners fairly and will help to ensure that cities, counties, school districts and the state will receive the property taxes due. The bill has been referred to the House Tourism and Outdoor Recreation Committee.
• Update the Limited Liability Entity minimum fee to take inflation into account– The governor also proposed raising the limited liability entity (LLE) minimum tax from its current $175 to $225.  LLEs are businesses that are not organized as corporations, but that receive the same legal protections. It is wrong to assume they are all “small businesses” because many large corporations organize as LLEs or have LLE subsidiaries. According to one estimate, 82% of LLEs only pay the minimum fee because the tax exemption from paying the full LLE tax is so generous. The $175 fee was not indexed for inflation when it was created in 2006, and $225 simply makes the inflation adjustment over that time period. It would raise $8.2 million annually.
• Consider a temporary emergency surcharge on high earners – Though not on the table currently, Kentucky should create a temporary income tax surcharge on high earners to generate needed short-term revenues to both address immediate costs associated with coronavirus demands, a possible need for additional services in light of an economic downturn and in recognition of the resulting drop in revenues. A high-income surcharge applying, for example, to incomes above $150,000 would avoid affecting working families struggling to get by. It could be designed to go away in a short period of time (for example, 1-2 years) based on the state’s unemployment rate.

More commonsense revenue ideas are available in our Revenue Options report and in HB 416 sponsored by Representative Willner. It is a comprehensive proposal to clean up General Fund tax breaks that raises over $1 billion annually in new revenue, while holding the bottom 80% of Kentuckians harmless and asking more from the wealthiest Kentuckians. And even though HB 416 cleans up many tax breaks the wealthy benefit from, the top 20% would still pay less in state and federal income taxes combined than they did three years ago before significant new tax cuts were passed.

In addition to the proposals that would provide new revenues for the General Fund, the General Assembly should also pass HB 580 sponsored by Representative Santoro – a comprehensive proposal that is expected to generate $483 million annually to help support maintenance of our transportation infrastructure at the state, county and city levels. This bill has been referred to the House Appropriations and Revenue Committee.

Two: Oppose new tax breaks or expansions of existing ones

There have been more than 50 bills filed during the 2020 legislative session seeking to amend our tax code to provide additional exemptions, expansions, credits, carve-outs or special treatment for a particular industry or cause. While none of these proposals appear to be moving forward currently, we are at the point in the session where legislators are considering the budget, and where negotiations between the House and the Senate will soon begin. It was during this period in both 2018 and 2019 that many costly tax breaks and tax cuts, most of which were not previously proposed or discussed during the legislative committee process, were inserted into bills that moved quickly through the legislative process without adequate transparency or accountability to the public.

Legislators should not enact new tax breaks, or expand existing tax breaks, because we cannot afford them. We also encourage the continued suspension or repeal of the angel investor tax credit program (currently suspended until January of 2021) which provides an overly generous and poorly targeted subsidy for wealthy investors.   

Three: Pass measures that will support the regular and systemic clean-up of existing tax breaks

Finally, legislators should pass measures that will provide more fiscal transparency both for legislation being considered by the General Assembly and tax breaks that are already on the books so they have adequate information to make fiscally responsible decisions about the budget in the future. Legislators from both parties have filed four bills this session (HB 63, HB 413, HB 422 and HB 533) that seek to provide more transparency, greater oversight and better information about the impact of proposed and enacted legislation on state revenues. The growing, bipartisan interest in such accountability measures may not be enough to improve the 2020-2022 Budget of the Commonwealth, but should be acted on now as a key part of making better decisions about Kentucky’s budget in the future.

[i] For instance, in testimony to the House Budget Review Subcommittee on General Government on February 11, 2020, it was reported that there is a waiting list of 218 veterans who need care in state-operated veteran’s nursing homes. Even though there are enough beds to serve everyone, facilities are under-staffed due to insufficient resources and low levels of pay. The inability to offer competitive salaries is a problem that exists across state government resulting high turnover, heavy workloads, and the inability to fill vacant positions and provide services.

 

The House budget plan includes many of the same priorities that the governor proposed, but contains a different emphasis in a variety of areas. Compared to the governor’s budget, the House budget proposes a smaller raise for teachers and a 1% raise for other school district employees not included in the governor’s plan; fewer new social workers but higher social worker salaries; and more money for the rainy day fund with an additional $89 million as opposed to $10 million more in the governor’s plan. Unlike the governor proposal, the House budget includes no new revenue.

Both proposals stop the trend of budget cuts, but in many areas funding will continue to erode due to inflation, which is projected at approximately 2.5% a year according to the Congressional Budget Office.

Budget spreads out teacher raise, provides slightly less to core school funding overall

The House budget provides a 1% pay increase each year for all teachers and other school employees, in contrast to the governor’s proposed $2,000 raise (3.7% on average) restricted to teachers with no additional raise the second year of the budget.

It provides a $61 increase in the Support Educational Excellence in Kentucky (SEEK) per-pupil base guarantee in 2021 and an additional $51 in 2022. That 1.5% increase the first year and 1.3% the second is higher than the 1% increase in the governor’s plan, which applied only to the first year. However, the House proposal includes the 1% pay raise as part of that school funding increase, whereas the governor’s proposed $2,000 raise per teacher was outside of the base SEEK guarantee.

That makes the overall SEEK formula funding in the House budget somewhat smaller than in the governor’s budget, as shown in the graph below. As in the governor’s plan, the House budget does not increase funding for student transportation, which remains at approximately two-thirds of the statutorily required amount. In both budgets, per-pupil funding for SEEK will continue to erode with inflation. Kentucky is already 4^th-worst among states for per-pupil cuts in core funding since 2008.

The House budget makes other changes to education spending compared to what the governor proposed:

• The House budget adds $39 million (plus pension and health costs) over the biennium to hire new mental health professionals, a portion of the counseling staff intended in the school safety bill (2019 SB 1). Funding for these additional counselors was not included in the governor’s proposal. Also the House funds the $18.7 million in school building safety improvements through appropriations rather than through borrowing as proposed in the governor’s budget.
• The House adds $5 million a year for textbooks compared to $11 million a year in the governor’s plan.
• The House budget cuts $7.5 million a year contained in the last budget in grants for collaboration between private child care centers and preschools (though it increases childcare funding, see below). It adds $4 million to raise eligibility for preschool to 175% of the federal poverty level (FPL) in 2022. The governor’s proposal, in contrast, added $5 million each year of the budget to support preschool in low-income districts.

Like the governor’s budget, the House budget does not increase funding for Extended School Services, which was cut by 6.25% in the last budget. As proposed by both the governor and the House budget, some of the additional funding for P-12 education comes from $85 million in SEEK funds originally budgeted in the current year but now expected to go unspent.

Proposal provides small increase for higher education, requires performance funding

The plan provides an amount for universities and community colleges similar to the governor’s proposed 1% increase the first year and provides additional dollars on top of that the second year. The budget puts $64 million of that appropriation over the biennium through the performance funding system which, as we have noted, is disadvantaging universities and community colleges with more low-income students and students of color. The governor had proposed not using the model in his budget.

Funding for need-based college scholarships is very similar in the House budget to what the governor proposed. The House budget provides 88% and 86% of the statutory funding requirement for need-based aid in 2021 and 2022 respectively.

Budget changes approach to social workers, puts more to the rainy day fund

The budget provides for 100 new social workers across the biennium to deal with the crisis in child protective services, significantly fewer than the 350 new social workers the governor proposed. Instead it increases the pay for new social workers by 10% and provides a 5% raise for existing social workers and an additional $960 in retention pay each year. It provides 200 new Michelle P waiver slots and 50 new Supports for Community Living waiver slots that provide community-based care for individuals with disabilities (the governor’s budget had proposed 500 and 100 new slots, respectively). There are over 9,000 people on waiting lists for those slots.

The House also provides $15 million per fiscal year to raise the eligibility limit for the Child Care Assistance Program (CCAP) from 160% of FPL to 175% FPL (which, for a family of four is $41,920 and $45,850 respectively).

The House budget does not provide $34 million a year in General Fund dollars to support Kentucky Wired, as the governor had provided, leaving it to rely only on restricted funds. The House sends 100% of the coal severance tax monies to the coal regions, as the governor proposed, but reduces the flexibility in how those monies can be spent. The House cuts $2.5 million a year in operating aid to local libraries that was in the governor’s proposal and, unlike the governor’s plan, did not provide funding for the Commission on Women.

The House budget adds $89 million to the rainy day fund compared to $10 million added in the governor’s plan. That would bring the fund up to $392.4 million, or 3.3% of revenue — less than the 5% goal set in statute as a minimum benchmark to help prepare for a recession. That level would still keep Kentucky’s rainy day fund among the poorest funded in the country; the median state rainy day fund was at 11.1% as of 2018.

Budget includes 1% raises for employees and changes funding formula for quasi pensions

Like the governor’s budget, the House budget provides a 1% raise for most all state employees in 2021 and another 1% in 2022; they had not received across-the-board raises for 8 of the previous 10 years. It also provides cost of living raises for state police and employees of the state police lab.

The House budget fully funds the actuarially recommended pension contribution to the Kentucky Retirement Systems for state employees, including funding at 93% of pay for non-hazardous state workers. For quasi-governmental organizations like community mental health centers, health departments, regional universities and domestic violence agencies, it takes a different approach than the governor’s proposal. The governor’s plan provided $50 million more a year to help agencies pay half of the cost of getting their contribution to 83% of pay. The House budget instead adopts the “fixed dollar” funding formula of HB 171 in which agencies’ individual contribution levels differ widely based on their actual liability. It then provides monies to help with a significant portion of the payments.  

The budget provides full funding for the Teachers’ Retirement System pension contributions, but only provides the first year of $62 million in appropriations for health insurance coverage for teacher retirees under the age of 65, relying on the retiree health fund (or a surplus should it materialize) to cover the second year (as was included in the last two-year budget). The governor had proposed funding these benefits through the budget for both years.

Plan doesn’t include new revenue and uses one-time dollars

Unlike the governor’s proposal, the House does not include a revenue-raising plan. The governor’s plan included $73 million in new revenue the first year and $75 million the second from tobacco taxes, sports betting and a higher limited liability entity fee. Separately, however, the House has passed HB 32, which is estimated to raise $27 million in 2022 by taxing vaping and imposing a higher tax on other tobacco products.

The House proposal includes $250 million in executive branch fund transfers over the biennium, less than the $276 million used in the governor’s budget. The biggest sources are the Petroleum Storage Tank Fund, from which it transfers $43 million (the governor’s budget swept $93 million and bonded a portion of that). Like the governor’s budget, the House budget does not take money from the public employees’ health fund, as had been used in the past.

All Kentucky children – living in poor and wealthy districts, black, brown and white, whose parents didn’t finish high school and that have advanced degrees – deserve a high-quality education that will equip them to contribute fully to their community and the state’s economy. The most efficient and effective way to invest state tax dollars toward that end is to adequately and equitably fund the state’s public schools.

But House Bill 350 (HB 350) and its companion bill in the Senate (SB 110) would siphon a large and growing amount of public resources through a tax break for donors to private schools, deepening the fiscal strain public schools are experiencing after a decade of state budget cuts.

Compared to previous versions of the proposal, this year’s bills are largely similar yet even more expensive, with a cost that could total as much as $1 billion over just 11 years. By providing no sunset date or ultimate cap on the program, costs would continue to grow over time, consuming an increasing share of resources that would otherwise be invested in public services through the state budget.

Rich tax break will be very costly for state and harm public schools

Direct public spending on private schools through vouchers is prohibited by Kentucky’s constitution. Accomplishing the same purpose through the tax code instead with an almost 100 percent tax credit seemingly circumvents this prohibition, which is why these programs, currently existing in 18 other states, are also called “back door vouchers” or “neo-vouchers.”

For donors of cash and marketable securities to private school scholarship granting organizations (SGOs), the proposed program would carve out a large tax break against individual, limited liability, corporate and bank franchise taxes. At 95 cents for every dollar of donations up to $1 million – increasing to 97 cents for multi-year donations – this incredibly rich tax break is 19 times bigger than the state’s charitable deduction for other kinds of giving, and would be the most generous tax credit offered in Kentucky. And it allows donors with less tax liability than tax credit to carry forward the unused portion for up to 5 years.

The cost of the tax break is capped at $25 million in the first year, and if 90 percent of that amount is utilized, the cap will grow by 25 percent the following year. It is very likely the full cap will be used because “donors” can ensure an almost complete return of the amount contributed due to the generosity of the credit. In addition, some donors may be able to even turn a profit from giving (described below). This large payback allows the individuals, businesses and financial institutions making the contributions to directly transfer public resources to private education at nearly no cost to themselves, or even to potential personal financial gain. A similarly-designed program in Florida is evidence that the fiscal impact of HB 350 would rapidly grow, putting extreme fiscal strain on the state budget and on state funding for public education.

While last year’s bill would have limited the overall General Fund impact to a still-unaffordable $209 million over the 6-year course of the tax credit, HB 350’s unrestricted time-frame could cost as much as $831 million over 10 years with the potential to scale up to a cumulative $8.6 billion over 20 years – and more thereafter.

Public resources will subsidize tuition for relatively well-off families

Though proponents suggest these tax breaks are a way to provide a private school option to families who would otherwise not be able to afford it, the proposal insufficiently targets low- or even moderate-income families.

• Income eligibility for the scholarship is up to 200 percent of household income necessary for reduced-price meals. Reduced price meal eligibility is 185 percent of the federal poverty line (FPL) based on family size.
• For a family of four, multiplying the FPL of $25,750 by 185 percent, and then by 200 percent yields $95,275.
• That’s so generous a limit that 71% of Kentucky children age 18 and under would qualify.

Last year we debunked the national “EdChoice” advocates’ claim that a private school tax credit would save Kentucky money. The generous income eligibility criteria described above does not just undermine the stated purpose of providing private school access to families that otherwise couldn’t afford tuition, but it is also is a reason why proponents’ claim that the program would result in savings falls apart under scrutiny.

With the ability of students from relatively well-off families to participate, and with no requirement that recipients previously attend public schools, many families already paying or planning to pay for private schools would benefit from the scholarships. That means less resources for public schools without an equivalent reduction in the number of students public schools are responsible for educating. Testimony at the March 5, 2019 House Appropriations and Revenue Committee on last year’s bill came from parents who already had children in private school without the aid of a tax credit scholarship program. 

Compared to last year’s proposal, HB 350 also worsens the cost impact by increasing the share of first-time scholarships that can go to relatively well-off families who are more likely to send their kids to private schools even without the scholarship. The 2019 bill stipulated that the share of awards going to low-income, foster and students with special needs must equal 90% of the statewide share of students eligible for reduced price meals (which was 73% in 2019, for a total of 66%). Under HB 350, simply a majority (>50%) of first-time recipients must be in this targeted group.

Worse still, because of the way the proposal gives scholarship priority to past recipients and their siblings regardless of family incomes (which tend to grow), over time, better-off beneficiaries are likely to crowd out lower-income applicants. In other words, after year one of the program, scholarships are awarded first to students who received one the previous year and their siblings. Only if any money is left over does a share (>50%) go to students in need.

For those children who do leave public school to attend private school through the program, Kentucky educators and administrators testified at the same hearing in 2019 that limited savings resulting from having fewer students to educate would not offset the losses in state revenue; When enrollment declines, schools’ fixed and stranded costs remain the same. The bill will reduce General Fund resources overall, and reduce state payments to districts when enrollment declines.

Research supports cost concerns

Neovoucher advocates’ claim that public schools will come out ahead financially is supported almost exclusively by analyses done by Martin Lueken of Ed Choice, a national group in favor of private school tax breaks. In fact, last year Kentucky advocates of the bill shared a “fiscal impact statement” written by Lueken and crafted to look much like the LRC’s fiscal notes.

Lueken’s analysis is based on the idea that scholarships to private schools cost less per pupil than a public education, and looks at existing programs in other states to back up these claims. However, a closer examination by the National Education Policy Center at the University of Colorado reveals these claims are unsubstantiated based on problems related to whether students actually leave public for private schools and, in the cases that they do, whether districts are able to reduce their costs enough:

• Hypothetical savings could only occur when students leave public schools to attend private schools. Lueken’s analysis assumes that 90% of Kentucky participants would switch from public to private schools but as described above, the program is insufficiently targeted to students who otherwise wouldn’t be able to afford tuition. Programs in other states that do not target low-income public school students end up instead serving families with kids already enrolled in private schools.
• When a student does switch from a public to a private school and the public school loses its state allotment for that student, the public school may be able to reduce spending on certain variable costs related to the individual student (obviously, fixed costs on things like facilities, maintenance and debt service don’t go down). Lueken asserts these variable costs are reduced by more than state funding goes down without listing or explaining variable costs that are associated with individual student enrollment. Even if a high number of students were to switch, they would likely be disbursed across different schools and grades, making it much less likely that a district would be able to sufficiently reduce overall costs.

What this all means is that HB 350 will cost our public P-12 classrooms in two ways: schools are likely to lose more state funding than their costs are reduced when students switch from public to private schools, even while a large amount of tax revenue for public school funding will no longer be available because the program pays for the tuition of children who are already attending private school.

Program still allows “donors” to profit

As mentioned previously, the proposal would provide a credit of 95 or 97 cents for every dollar donated. By stacking their federal charitable deduction on top of the state credit, donors could recoup between 97% and 100% of their donation. As with previous private school tax credit proposals, HB 350 would also allow donors to make money from redirecting public resources to private schools. This would occur if they donate stocks and – in addition to the dollar for dollar credit – avoid capital gains taxes on the stock’s appreciated value.

HB 350 would create the richest tax break in Kentucky’s tax system, rewarding donors to private schools far beyond the charitable deduction for donations to churches and synagogues, domestic violence shelters, hospital charities, Habitat for Humanity, Girls’ and Boys’ Clubs and humane societies. It will greatly diminish the limited resources the state has to uphold its duty to efficiently provide an equal and high-quality education to all Kentucky kids. 

Betting using instant wagering machines, which resemble and operate similar to slot machines, has exploded across Kentucky and thousands more machines will come online in the near future. Yet the state taxes them at very low rates compared to slot machines in other states and even compared to live racing within Kentucky at comparable levels of betting. Especially in the face of more state budget cuts next session unless new revenue is generated, taxing these machines appropriately is an action the 2020 General Assembly should take.

Lost revenue is substantial

In May, we wrote about the missed opportunities and lost revenues because of Kentucky’s failure to uniformly tax betting that is already happening in our state.  At that time, we estimated the potential new revenues from taxing all betting at a uniform 3.5% of average daily handle (the average amount bet daily), and depositing all the resulting new revenues in the General Fund, at over $40 million.

Since then, instant racing machine use has continued to grow rapidly. Based on new information, we now estimate the potential new revenues at over $60 million annually, excluding the expansion of instant racing machines described below. If the tax rate is increased and the planned expansions occur, potential new revenues over the next two years could increase to as much as $80 –$100 million, providing significant support to much-needed investments in the commonwealth.

Casinos are here—in the form of “instant racing” slot machine parlors

Between 2018 and 2019, the amount bet through instant racing machines increased by 80%, or just over $900 million, primarily due to the addition of 900 new machines at Derby City Gaming in Louisville in September of 2018. Existing instant racing venues also experienced double–digit growth in the amount bet and gross commission per day, per machine.

Moving forward, there will be a more than tripling of the number of instant racing machines operating in the state. On top of the 2,800 machines now in use, the Kentucky Horse Racing Commission has approved the addition of over 7,000 new machines that will likely become operational over the next 24 months, including the following:

• Oak Grove, a new facility currently under construction in Christian County, which is jointly operated by Churchill Downs and Keeneland. It includes an instant gaming parlor, hotel, equine center and Standardbred track. Oak Grove began offering live betting on Standardbred races in October of 2019, and plans to open its instant gaming facility in June of 2020 with 1,200 instant racing machines.
• Kentucky Downs, located in Simpson County, which was recently purchased by new owners from Nevada. The facility is expanding with an anticipated completion date of September 2020 for the first phase, which will increase the number of instant racing machines at the location from 753 to 1,200.
• Ellis Park, located in Henderson County, which was recently purchased for the second time in less than a year by Ellis Entertainment, a subsidiary of Laguna Development Corporation, based in New Mexico. In June 2019, the track was approved to increase the number of instant racing machines from 179 to 1,200 as part of a renovation and expansion.
• Churchill Downs announced in October of 2019 a significant renovation project that includes a hotel and an instant racing parlor with 900 machines at its flagship track facility. The projected completion date is late 2021. (It should be noted that Churchill has received approval for a total of 3,000 machines that can be deployed at Derby City or at the new on-track facility. Derby City currently has 1,000 machines, so a total of 2,000 additional machines can be deployed by Churchill at any time).
• Churchill Downs purchased Turfway Park, located in Boone County in October 2019. Turfway is the only thoroughbred track in Kentucky that currently does not have instant racing machines. As part of the approval process, the Kentucky Horse Racing Commission approved up to 2,500 instant racing machines, which will be part of a major renovation that is expected to be completed in late 2021.

Kentucky’s tax rates on slots are extremely low

Kentucky’s tax rate on instant racing is very low compared to the rate imposed on live racing in the state at tracks with comparable average daily handles. Instant racing is currently taxed at just 1.5% of the average daily handle, compared to a rate of 3.5% imposed against betting at tracks with an average daily handle of over $1.2 million (2 of the 4 instant racing facilities currently operating have an average daily handle of over $1.2 million, with Keeneland/Red Mile likely to hit that level in 2020). 

Kentucky’s tax on instant racing slot machines is also low compared to how other states tax slots. Most states impose gambling taxes based on “gross revenues,” which are generally defined as the amount that remains after paying winning bets. Our surrounding states impose taxes on gross revenues from slot machines at rates ranging from 26% in Missouri to 53.5% in West Virginia.  In comparison, Kentucky’s effective tax rate on instant racing, calculated on the same base used by other states, is just 18%. But that number overstates what Kentucky collects because most of the tax receipts are required by statute to be distributed back to the industry. For example, in 2019, 60% of the taxes collected were distributed to purse support funds, backside improvement funds for race tracks and other industry-related endeavors. The effective tax rate based on revenues deposited in the General Fund is even lower at just 8%.

Given the significant growth that has already occurred, the planned expansions that are currently underway, and current tax rates that are well below industry averages, and which primarily benefit the horse industry, there is significant room to generate additional revenues while still providing strong support for the industry. Taxing these rapidly proliferating casino-style slot machines and investing the revenues in the commonwealth is an opportunity the 2020 Kentucky General Assembly should not miss.

Note: The legality of instant racing machines remains at issue. A lawsuit challenging whether bets made through instant racing machines constitute pari-mutuel wagering, the only form of betting that is legal in Kentucky, other than the lottery, is currently before the Kentucky Supreme Court on appeal from a 2018 ruling of the Franklin Circuit Court which found instant racing bets to be pari-mutuel. The court is expected to hear oral arguments and to rule on the case in early 2020.   

In interviews leading up to the 2020 session, legislative leaders have expressed their desire to continue down the path of reducing income taxes and paying for the reductions by relying more on the sales tax and other consumption taxes. Just like the last time, such a shift would provide huge tax cuts for people at the top — including a cut of $6,814 for people who make $1 million a year on average — that are paid for with higher taxes for low- and middle-income Kentuckians. And it would continue worsening income inequality between white Kentuckians and Kentuckians of color.

The General Assembly started this process in 2018 with the passage of legislation that dramatically shifted tax responsibility from the wealthiest people to everyone else. The tax changes made in 2018 raised some revenue, but over half was used to pay for cuts in the income tax rate that primarily benefited corporations and the wealthy. The legislature then came back in 2019 and provided even more tax breaks for corporations and the wealthy, with significant tax reductions for banks and multinational corporations, further reducing resources needed to make critical investments in our commonwealth.

In exploring how a further shift from the income tax to the sales tax might play out, we asked the Institute on Taxation and Economic Policy (ITEP) to estimate what the sales tax rate would need to be to offset a further reduction of the income tax rate from 5% to 4%, and how such a change would impact Kentuckians. Their analysis shows that the sales tax rate would need to increase from the current 6% to 7.25% — which would tie Kentucky with California for the highest state sales tax rate in the country.

How much you make would determine how you are impacted by this shift: households in the top 20% would experience significant tax reductions, with the top 1% gaining the most and receiving an average tax cut of $6,814. Yet the bottom 60% of Kentuckians – those making less than $59,000 – would pay more in taxes, as illustrated below.

Due to historical, structural barriers that have resulted in lower incomes for people of color in Kentucky, continuing the shift from income to sales taxes will further widen income inequality between white Kentuckians and Kentuckians of color. Analysis from ITEP shows that more white Kentuckians will get big tax cuts, while more Kentuckians of color will end up paying additional taxes, under such a plan:

• 21% of white Kentucky households are in the top 20% of all households (receiving tax cuts), and 58% are in the bottom 60% (receiving tax increases).
• 10% of black Kentucky households are in the top 20%, and 80% are in the bottom 60%.
• 17% of Hispanic Kentucky households are in the top 20%, and 72% are in the bottom 60%.

Similarly, rural communities in Kentucky will be disproportionately harmed from further shifting to sales taxes because of lower incomes overall in Kentucky’s rural areas.  

It is important to note that Kentucky’s tax system already had this upside-down quality even before the recent tax laws passed. The 2018 and 2019 tax changes exacerbated this problem, and continuing the shift would only make inequality in our state widen further. 

In addition to shifting taxes from those who can most afford to pay to those who can least afford to pay, it does not bode well for our future to rely on slower-growing consumption taxes while moving away from the more productive income taxes. In an economy where nearly all of the growth is at the top, and corporations are experiencing record profits, a tax system that asks less of those with the most will fail to take advantage of that growth. The result will be revenues that do not keep pace with the economy, creating more stress on our already overextended General Fund. 

Proponents of this approach maintain that with lower taxes, the wealthy and corporations will stimulate our economy. The problem is that this “trickle down” approach has never worked as described, evidenced by the failed experiment in Kansas. We already have a significant and growing structural deficit in Kentucky – which means that the revenue we take in is less than the amount we spend, and the evidence is clear on all fronts that more investment is needed if we want to thrive and prosper. In fact, public investments in our state help grow the economy by plowing resources back into communities.

Kentucky can benefit greatly from investing in good schools, public health, clean drinking water, broadband internet access, addiction treatment and so much more. And we have evidence-based policies to clean up tax breaks and generate revenue for these priorities.  But we will not be able to make progress if we stay on the path of eroding state revenue through more tax giveaways to the powerful and well-off.

 

PDF copy – Disparate Justice: Where Kentuckians Live Determines Whether They Stay in Jail

Kentuckians presumed innocent should not have their freedom contingent upon their income or where in the state they are arrested. And yet new data shows widely varying rates between counties in the use of cash bail and in the ability of those arrested to meet those monetary conditions. The share of cases with defendants released pretrial without monetary conditions ranges from just 5% in McCracken County to 68% in Martin County. And just 17% of cases subject to monetary bail in Wolfe County result in the defendant finding a way to make the payment while 99% do in Hopkins County.

The data suggests an arbitrary system of justice based on location. In certain counties, people with low incomes face much higher risk of harms from being detained in jail ranging from job loss to higher likelihoods of being found guilty and committing crimes in the future. In addition, counties that detain more people on monetary conditions face additional jail costs many of them cannot afford.[1]

This data from Kentucky’s Administrative Office of the Courts (AOC) underscores the critical need for reform of the pretrial release system in Kentucky, especially as it relates to the imposition of monetary bail as a condition of release. It also raises serious questions about whether there is equal justice statewide due to vastly different pretrial release practices of our local justice systems.

Negative individual, family and community impacts of incarceration widen existing disparities

The consequences of pretrial detention for individuals, families and communities when a person cannot afford bail are devastating and far-reaching – and important context for a conversation about Kentucky’s low and disparate rates of non-financial pretrial release. Because people with low incomes struggle to pay bail – and because historic, structural barriers have resulted in disproportionately low incomes for people of color – these communities in our state bear the brunt of the consequences of our unreformed pretrial system. Several studies have also found that people of color are often treated more harshly than white people during the pretrial release decision-making process.[2]

It can take months for a case to work its way through the system – time during which an individual who is incarcerated pretrial cannot earn income, keep a job or provide caretaking at home, for example.[3] Even those found not guilty of the crime for which they were arrested may lose months of their lives behind bars.

Research also shows people incarcerated pretrial are actually more likely to be found guilty and to receive harsher sentences.[4] Defendants are also more likely to plead guilty (even when they are innocent) when detained pretrial in order to be able to return to their homes and communities.[5] As a result, individuals detained pretrial are more likely to face the collateral consequences of having a felony record – economic insecurity and poor health, not only for themselves, but for their children and other family members as well.[6] Pretrial incarceration is also associated with an increased likelihood of criminal activity in the future.

In addition, it is important to note that most of Kentucky’s local jails are not equipped to provide treatment — pretrial or otherwise — for the many people whose involvement in the justice system stems from a substance use disorder.[7]

The over-incarceration of people pretrial also has a significant impact on costs in our corrections systems, including severe overcrowding in many local jails that is expensive financially, and results in poor living conditions.[8]

Nearly 60% of cases in Kentucky are subject to money bail while defendants await trial

A judge ultimately determines the conditions under which a person who is arrested in Kentucky may be released before trial based on an assessment of risk that they will fail to appear in court and risk that they will engage in new criminal activity if released. (You can read more about the risk assessment in the box at the end of this report.) The options include non-financial and financial terms of release.

Non-financial options for release (or non-financial bond) are:

• Release on recognizance – a person is released without any specific conditions other than appearing at required court dates.
• Unsecured bond – the judge sets a bond amount but the person is not required to pay it to be released; the money would only come due if a person does not come to designated court dates.
• Surety – a third party must sign with the defendant to allow for release; usually the third party is required to own property, although a lien would not necessarily be placed upon the property.[9]

Financial options for release (or financial bond, often referred to as “money bail”) are:

• Cash – a person must pay the full amount set as bail plus fees to be released pretrial.
• 10% bond – a person must pay 10% of the cash amount set as bail before being released.
• Property – a person can be released pretrial if they have an equity interest in property that is equal to twice the amount of bail; a lien is then placed on the property to secure the bail.

By law, money bail in Kentucky cannot be used to punish or detain individuals; it can be used only to ensure reasonable appearance at trial, and only in the amount “sufficient” to do so.[10] However, as described below many defendants in Kentucky are unable to afford bail, which results in them being detained pretrial.

The statistics paint a bleak picture of pretrial release in Kentucky. Just 40% of criminal district court and circuit court cases in Kentucky resulted in release pretrial on non-financial bond.[11] Meanwhile, for those subject to money bail — which is 57% of cases — just 39% (48,866 out of 124,102) resulted in pretrial release.[12] As described later in this report, it is fair to assume that a large share of those subject to money bail who were not released could not afford to pay bail. To provide context, in Washington D.C., more than 90% of defendants are released on non-financial conditions and 5% are released on money bail.[13] Kentucky’s rate of pretrial release with non-financial conditions is also very low compared to a national sample of felony defendants.[14]

At the same time, studies call into question the effectiveness of money bail at ensuring appearance at court and preventing crime. For example, a study by the Pretrial Justice Institute found unsecured bonds are as effective as money bail in protecting public safety and ensuring defendants appear in court.[15] And Kentucky pretrial data shows the appearance rate in court for those released pretrial is already pretty high at 79% overall — 63% for those at highest risk of “failure to appear.”[16] In addition, 89% of individuals released pretrial in 2018 were not charged with new crimes before trial — including 76% of those identified by the assessment instrument as having a higher risk of re-offense. And as a reference point, in Washington D.C., where 9 out of 10 defendants were released with non-financial conditions in 2015, 90% of those released came back to court, and 91% did not re-offend during the pretrial period. In other words, D.C.’s high rate of pretrial release does not correlate with higher rates of flight or pretrial crime relative to Kentucky.[17]

Pretrial release practices vary dramatically by county

Low-income people and Kentuckians of color are disproportionately harmed by a system that relies too heavily on financial conditions of release, but it also depends on where one lives whether or not pretrial release is accessible. There is extreme variation in pretrial practices from county to county under our current system, as demonstrated by AOC data. As shown in the map below, rates of pretrial release on non-financial bonds in 2018 are wildly inconsistent across the state, ranging from just 5% in McCracken County to 68% in Martin County. 65 counties were below the 40% statewide release rate on non-financial bond, which is a low bar.

This wide variation among counties, including neighboring counties, is evidence that the current system is arbitrary. The penalty for being poor for a person arrested in one county could be substantially greater than a person arrested across county lines for the same offense.

Here are a few examples of the dramatic disparities in contiguous counties:

• The rate of pretrial release on non-financial bonds in 2018 in Boyd County was just 17%, while a defendant would have had a better chance of pretrial release in Lawrence County (65%), Carter County (49%) and Greenup County (42%).
• McCracken County, which has the lowest rate of pretrial release on non-financial bond at 5%, borders Marshall County, which has a rate of 51%.
• Henderson County has an 11% rate of release on non-financial bond compared to neighboring Daviess County’s 52%.
• In Shelby County the rate of release on non-financial bond is 19% and Spencer County’s is 24%, compared to Jefferson’s 53% rate of release on non-financial bond.[18]

In other words, where a person is charged with a crime makes a big difference as to whether or not they sit in jail awaiting trial or are released — and whether they face losing employment and other collateral consequences.

Ability to be released if financial conditions are imposed is low and varies significantly by county

The ability of those offered release with financial conditions to actually meet those conditions also varies significantly among counties and depends on an individual’s economic circumstances and how high judges set financial bail. While the available AOC data doesn’t include the amount of bail or other financial conditions set by judges, it does indicate how many cases subject to financial conditions result in release — which provides an idea of how many cases were set at amounts affordable for defendants. A separate analysis of 2016 AOC data found that for the state as a whole, bond amounts did not correlate with risk levels of defendants (i.e., low risk versus high risk).[19] 

As noted previously, for those who are given financial conditions of release, the statewide rate of pretrial release was just 39 percent in 2018. At the county level, in Hopkins County 99% of cases subject to financial conditions resulted in pretrial release, while in Wolfe County, only 17% did. Data is not available to pinpoint why this is the case, but a plausible reason for the disparity is that bail amounts set in Hopkins County may be more affordable than those set in Wolfe County. Regardless, a disparity of this magnitude indicates the need for further study.

The map below shows the variation in pretrial release among counties across the state. It is particularly notable that several counties with very low rates of release on non-financial conditions also have low rates of release on financial conditions: Laurel, Fayette, Todd, Knox, Logan, Breathitt, Powell and Wolfe. This means that if a person is arrested in one of these counties, there is an especially low chance that they will be released pretrial.

Bail reform needed

A mounting body of research shows that pretrial decisions have a tremendous impact on individuals, families and communities. And it’s costly to local governments to detain individuals pretrial, contributing to the state’s jail overcrowding problems and local budget challenges. Yet the majority of people arrested and taken to jail in Kentucky pretrial are subject to financial conditions for release, an insurmountable barrier for many. In addition, dramatically inconsistent pretrial practices between counties point to the arbitrariness of our current pretrial practices and the need for legislative pretrial reforms. More Kentuckians should be released pretrial, and improving statewide standards will help address these local disparities.

Use of Kentucky’s Pretrial Risk Assessment Tool in Release Decisions

Each defendant receives a pretrial risk assessment that predicts their risk of failing to appear in court and of engaging in new criminal activity if released pretrial.[20] The risk assessment must be considered by the judge, and is performed by Kentucky Pretrial Services, which is a part of the Court of Justice.[21] The risk assessment tool, the Public Safety Assessment (PSA), assigns points based on prior involvement in the criminal justice system, prior failures to appear in court and prior convictions for violent offenses.[22] Based on the assessment, defendants are classified into one of five risk categories ranging from low risk to high risk.

The law requires a judge to release low and moderate risk defendants with non-financial conditions, although the court may require moderate risk defendants to be monitored, drug tested or supervised, and judges may override the findings of the risk assessment instrument if they find a defendant has a high flight or crime risk based on other factors. For those deemed high risk, the law stipulates that judges have discretion in the pretrial decision. Additional evidence beyond the pretrial risk assessment that is allowed into a bail hearing include the nature of the charge itself, marriage or family relationships, years of residency in the county, health, veteran status and danger to the community.[23]

If judges followed directives associated with the state’s risk assessment, and did not override findings, 90% of defendants would be granted immediate non-financial release.[24] In practice, research shows that the risk assessment does not factor heavily into pretrial decisions in Kentucky. Immediately following pretrial reforms enacted in 2011 (House Bill 463) – which resulted in the development of the risk assessment tool currently in use as well as the requirement that judges use it in making release decisions – Kentucky judges changed their pretrial practices and released more low-risk defendants. However, judges soon returned to their previous practices of subjecting more low-risk defendants to unaffordable bail and pretrial incarceration.[25]

Appendix: Pretrial Release Data by County

---

[1] Kentucky Educational Television, “Bail Reform,” Kentucky Tonight, Feb. 18, 2019. LeónDigard and Elizabeth Swavola, “Justice Denied: The Harmful and Lasting Effects of Pretrial Detention,” Vera Institute of Justice, April 2019, https://www.vera.org/publications/for-the-record-justice-denied-pretrial-detention. Patrick Liu, Ryan Nunn and Jay Shambaugh, “The Economics of Bail and Pretrial Detention,” The Hamilton Project, December 2018, http://www.hamiltonproject.org/assets/files/BailFineReform_EA_121818_6PM.pdf.

[2] Digard and Swavola, “Justice Denied.” A study of pretrial decisions in Miami and Philadelphia found bail judges in these cities are racially biased against Black defendants. David Arnold, Will Dobbie and Crystal Yang, “Racial Bias in Bail Decisions,” The Quarterly Journal of Economics (November 2018), pp. 1885-1932, https://academic.oup.com/qje/article-abstract/133/4/1885/5025665?redirectedFrom=fulltext. While Kentucky’s pretrial practices have not specially been studied in this way, we do know that African Americans are significantly overrepresented in the state criminal justice system. Ashley Spalding, “Criminal Justice Reform and Racial Disparities in Kentucky,” Kentucky Center for Economic Policy, Sept. 8, 2016, https://kypolicy.org/criminal-justice-reform-and-racial-disparities-in-kentucky-2/.

[3] Administrative Office of the Courts, “District Court Closing Caseload, Average Months Between Filing Date to Closing Date,” https://courts.ky.gov/aoc/statisticalreports/Documents/INS054.pdf. Administrative Office of the Courts, “Circuit Court Closing Caseload, Average Months Between Filing Date to Closing Date,” https://courts.ky.gov/aoc/statisticalreports/Documents/INS051.pdf.

[4] Digard and Swavola, “Justice Denied.” J. Acker, P. Braveman, E. Arkin, J. Parsons and G. Hobor, “Mass Incarceration Threatens Health Equity in America,” Jan. 15, 2019, https://www.rwjf.org/en/library/research/2019/01/mass-incarceration-threatens-health-equity-in-america.html.

[5] David Arnold, Will Dobbie and Crystal Yang, “Racial Bias in Bail Decisions,” IRS Working Paper, https://www.princeton.edu/~wdobbie/files/racialbias.pdf.

[6] J. Acker, P. Braveman, E. Arkin, L. Leviton, J. Parsons and G. Hobor, “Mass Incarceration Threatens Health Equity in America,” Robert Wood Johnson Foundation, Jan. 15, 2019, https://www.rwjf.org/en/library/research/2019/01/mass-incarceration-threatens-health-equity-in-america.html.

[7] Legislative Research Commission, “State Inmates Housed in County Jails in Kentucky,” Nov. 24, 2017, https://apps.legislature.ky.gov/lrc/publications/ResearchReports/RR430.pdf.

[8] Legislative Research Commission, “State Inmates Housed in County Jails in Kentucky.”

[9] These types of pretrial release are subject to approval on a local basis. If the defendant does not show up for court appearances, or does not abide by conditions imposed by the court, the third party surety may be subject to forfeiture by the court (the amount of the forfeiture would be the amount set as bail). Kentucky Court of Justice, “Interview Process & Release Alternatives,” https://courts.ky.gov/courtprograms/pretrialservices/Pages/interviewrelease.aspx.

[10] B. Scott West, “Five Bail Cases the Kentucky Criminal Defense Attorney Absolutely Must Know (and Why),” The Advocate, January 2017, https://dpa.ky.gov/Public_Defender_Resources/The%20Advocate/Advocate%20Newsletter%20Jan%202017%20(COLOR%20-%20FINAL).pdf.

[11] For most misdemeanor charges, defendants in Kentucky with low and moderate risk scores are now automatically released on recognizance to await trial, without going before a judge. This is a relatively recent development known as “administrative release. The release rates described in this report exclude administrative releases and also cases without a bond hearing. B. Scott West, “The Next Step in Pretrial Release Is Here: The Administrative Release Program,” The Advocate, January 2017, https://dpa.ky.gov/Public_Defender_Resources/The%20Advocate/Advocate%20Newsletter%20Jan%202017%20(COLOR%20-%20FINAL).pdf.

[12] The other 3% of cases were not offered any type of release. These are cases where there is a perceived presence of overwhelming proof of guilt.

[13] Pretrial Justice Institute, “The Pretrial Services Agency for the District of Columbia: Lessons From Five Decades of Innovation and Growth,” Aug. 22, 2018, https://university.pretrial.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=46b516e0-5ea0-a9a3-b070-ecd6bacd9ed0&forceDialog=0.

[14] Megan Stevenson, “Assessing Risk Assessment in Action,” Minnesota Law Review (August 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3016088.

[15] Michael R. Jones, “Unsecured Bonds: The As Effective and Most Efficient Pretrial Release Option,” Pretrial Justice Institute, 2013, https://perma.cc/US5H-MUFF. And one study based on Kentucky data showed incarceration for two to three days (as opposed to up to one day) — but ultimately being released pretrial — led to slightly lower rates of appearance in court. Christoper Lowenkamp, Marie VanNostrand and Alexander Holsinger, “The Hidden Costs of Pretrial Detention,” the Laura and John Arnold Foundation, 2013, https://craftmediabucket.s3.amazonaws.com/uploads/PDFs/LJAF_Report_hidden-costs_FNL.pdf.

[16] The data includes all individuals released pretrial under any conditions. Administrative Office of the Courts, “Safety, Appearance, and Release Rates for Disposed Cases in Pretrial Interviews Released FY 18 Statewide by Charge County,” Research and Statistics, Nov. 27, 2018.

[17] Pretrial Justice Institute, “The Pretrial Services Agency for the District of Columbia.”

[18] Additional examples of bordering counties with contrasting rates of release pretrial with nonfinancial conditions include: Pike County (24%) borders Martin (68%) and Letcher (51%) (a 44 percentage point difference and a 27 percentage point difference). Todd County’s release rate on non-financial bonds is just 18% while Christian County, which it borders, has a rate of 57% (a 39 percentage point difference). Knox County’s release rate on non-financial bonds is 19%, compared to neighboring Whitley (45%) (a 26 percentage point difference). Laurel County’s release rate on non-financial bond is 14% versus Rockcastle (51%), Pulaski (48%) and Whitley (45%) (a 37, 34 and 31 percentage point difference). Anderson County’s rate of release on non-financial bond is 22%, Spencer’s is 24% and Washington’s is 29% — compared to neighboring Nelson County’s rate of 54% (a 32, 30 and 25 percentage point difference). Webster County’s rate is 16% versus neighboring Hopkins’s 42% rate of release on non-financial bond (a 26 percentage point difference).

[19] Kentucky Criminal Justice Policy Assessment Council, “Kentucky CJPAC Justice Reinvestment Work Group Final Report,” December 2017, https://justice.ky.gov/Documents/KY%20Work%20Group%20Final%20Report%2012.18.pdf.

[20] The risk assessment tool has been shown by research to be effective in predicting “failure to appear” and “new criminal activity”

rates. Matthew DeMichele, Peter Baumgartner, Michael Wenger, Kelle Barrick, Megan Comfort and Shilpi Misra, “The Public Safety Assessment: A Re-Validation and Assessment of Predictive Utility and Differential Prediction by Race and Gender in Kentucky,” April 25, 2018, https://ssrn.com/abstract=3168452.

[21] KRS 431.066, https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=40904.

[22] Commonwealth of Kentucky Department of Public Advocacy, “Kentucky Pretrial Release Manual,” June 2013, https://dpa.ky.gov/Public_Defender_Resources/Documents/PretrialReleaseManualExternal102814REDUCED.pdf.

[23] In determining the amount of bail to set in the case of financial conditions of bail, a judge must consider several factors — not just the nature of the offenses charged against a defendant. KRS 431.525, https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=39565.

[24] Stevenson, “Assessing Risk Assessment in Action.”

[25] Stevenson, “Assessing Risk Assessment in Action.”