Budget and Tax

Published in the Lexington Herald-Leader, August 22, 2011.

Op-Ed: Focus on Spending Cuts Ignores Revenue Problem

By Jason Bailey

Kentucky is in great need of a substantive conversation about how to better fund essential services in its state budget.

But by ignoring the state’s revenue problems, the Kentucky Chamber of Commerce’s “Leaky Bucket” reports offer a one-dimensional and potentially harmful view of the state budget picture.

It is well-documented that Kentucky has problems with its tax system that prevent revenue from keeping up with the growing and changing economy. Simply put, our tax code is outdated and has too many holes.

Over time, the resulting gap between Kentucky’s needs and the resources we have to meet them keeps growing. If state General Fund revenue—Kentucky’s main pot of funding—was able to perform now as it did in the 1990s Kentucky would have over a billion more dollars a year to cope with the economic downturn and avoid deep cuts to services.

Without tax reform, the gap will continue to grow. The latest Consensus Forecasting Group estimate predicts an overall decline in revenue as a share of the Kentucky economy over the next four years.

Yet the Leaky Bucket reports overlook the state’s revenue issues to focus exclusively on cutting spending. The problem is that if the pie is getting continually smaller, efforts to divide it differently have diminishing effect. And while some ways to save money make good sense, others can harm Kentucky’s economy, health and quality of life.

The Chamber calls for reducing cost growth in Medicaid, public employee health benefits and the state’s prison system, and putting in place new budget mechanisms.

The first two of these challenges stem from broader and more fundamental problems with the American health care system that affect the private sector just as well as the public sector. All health care costs are growing too fast, and nationwide private insurance costs are growing at a faster rate than Medicaid once health differences are taken into account. While the Chamber points out that Kentucky’s Medicaid and public employee health care costs have grown rapidly over the past twelve years, in fact the cost of the state’s tax break for private health insurance has grown just as fast.

What is needed is additional system-wide health reform to put more emphasis on prevention of costly illnesses, coordination of care by doctors and other caregivers, reduction in administrative costs and more appropriate use of medical technologies.

In the meantime, we cannot simply blame Medicaid and public employees for the health system’s cost problems and make unreasonable cuts to benefits. Doing so runs the risk of further reducing Kentucky’s already poor health status. And in the case of public workers, we could hinder our ability to attract the qualified teachers, police officers and other public servants that we need.

On its third issue, the Chamber is right that we need to reduce prison costs by locking fewer people up for non-violent crimes and drug offenses. However, it’s important to note that potential budget savings from these efforts are limited because corrections make up only five percent of the budget, and a portion of the dollars saved must be reinvested in prevention efforts like drug treatment.

The Chamber’s recommendation that the state rebuild its rainy day fund is sound, as the fund did not have adequate resources going into the recession. The state should strive for reserves equal to 15 percent of annual spending rather than the five percent outlined in current statutes.

But the Chamber’s proposals for arbitrary limits on the state budget are without justification, and are dangerous. And the claim that Kentucky should prioritize education and economic development over all other areas ignores the range of investments that are important in a modern, complex economy and in a state with many needs. Investment in education is essential, but efforts that improve health and well-being, strengthen the state’s infrastructure, protect the environment and more are equally key to making Kentucky a great place to live and work.

Kentucky cannot just cut its way to greater prosperity and a higher quality of life. While smart spending decisions are a necessary part of good government, so is making sure the resources are there to pay for the investments we already have--and the ones we'll need for the future.

Jason Bailey is director of the Kentucky Center for Economic Policy, www.kypolicy.org.

Published in the Lexington Herald-Leader

http://www.kentucky.com/2011/04/15/1708672/ky-voices-gop-plan-breaks-medicare.html

Op-Ed: Proposed Medicare and Medicaid Cuts Break an American Promise

By Jason Bailey

For most advanced countries, health care is treated as a societal covenant in which all citizens have coverage for treatment of sickness, pain and disability. 

America has never made that universal covenant. But when the Medicare and Medicaid programs were enacted in the 1960s, our country did make an important promise: basic health security for seniors, people with disabilities, and children living in poverty. 

Now, Rep. Paul Ryan and the leaders of the U. S. House of Representatives have put forward a proposal that would break that promise.  

Ryan's new budget plan would deliberately erode the share of Medicaid and Medicare expenses the federal government will pay. That will unquestionably lead to loss of health care coverage, access and benefits for millions of Americans. 

The House plan is wrapped in rhetoric about fiscal responsibility and reducing the deficit. But it has no credibility on that claim. The plan contains deficit-worsening measures including huge new tax cuts for the wealthiest Americans and for corporations and repeal of the Affordable Care Act, which independent analysis has shown reduces the deficit in coming years. 

The plan redistributes wealth to the top and embodies an ideology that says government has little responsibility to provide for the common good and secure a basic standard of living for all. 

But those justifications are a hard sale, so Ryan and allies are trying to hitch their proposals to real economic challenges related to rising health care costs and eroding middle class economic security. 

But the real challenge the country faces in regard to rising health care costs is not caused by Medicare and Medicaid. 

Those programs are far more efficient than private health insurance. Medicaid costs less than private insurance once you adjust for health status--27 percent less for children and 20 percent less for adults. Medicare and Medicaid costs per beneficiary have been growing slower than private insurance. 

Instead, unsustainable cost growth is about the entire health care system. We don't spend enough to prevent health care problems or treat them early on, so we end up spending more later. We allow incentives for overutilization of expensive medical technologies without understanding their effectiveness. We don't do enough to stand up to powerful corporate interests in the insurance, pharmaceutical and other health care industries. 

The proposals in Ryan's plan would limit the federal government's contribution to Medicare and Medicaid to less than the cost of care in coming years. That will mean a big shift in costs either to states (in the case of Medicaid) or, more likely, to the elderly, poor and disabled. That will take the form of higher premiums and co-pays, reduced benefits, cuts in eligibility, and reductions in provider payments—a formula for greater financial strain on families and lower access to needed care. 

Congressional Budget Office analysis shows that in 2022 a typical 65 year-old would pay twice as much out of pocket for Medicare under Ryan’s plan than without it. 

Medicaid and Medicare are essential to health security in Kentucky, and will become even more important. The Affordable Care Act that Ryan proposes to repeal is scheduled to fill the hole in coverage for 261,000 uninsured Kentuckians through Medicaid. The share of the population over 65 in Kentucky, who benefit not just from Medicare but also Medicaid’s support for nursing homes, will grow from 13 percent now to 20 percent by 2030. 

In another health care struggle of a different time, President Harry Truman lamented that "millions of our citizens do not now have a full measure of opportunity to achieve and to enjoy good health. Millions do not now have protection or security against the economic effects of sickness. And the time has now arrived for action to help them attain that opportunity and to help them get that protection."

Truman couldn't achieve that goal, but he was on hand two decades later when President Lyndon Johnson signed the legislation creating Medicare and Medicaid.

Plans like Ryan's call the future of that 45 year-old achievement into question.

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP). KCEP is on the web at www.kypolicy.org.

Op-Ed: Federal Budget Debate Must Include Discussion of Investments Needed for Growth

By Jason Bailey

Important debates over the federal budget are now taking place in Congress. Kentucky’s representatives, including Senate Minority Leader Mitch McConnell, House Appropriations Committee Chair Hal Rogers, and Senator Rand Paul, are in the thick of this debate.

The work ahead is significant. In addition to finishing this year’s budget and crafting a budget for 2012, Congress must soon approve an increase in the amount of debt the federal government can owe in order to avoid default.

Some members of the Kentucky delegation are among those using current and future budget challenges as an opportunity to push for extreme, immediate cuts to the budget. We’re also hearing about proposals to set arbitrary limits on spending as a share of the economy and even a constitutional amendment to eliminate budget deficits.

Good choices on these critical questions require understanding of the causes of the budget deficit and the role of public investment in economic recovery and long-term growth.

The short-term budget deficit is higher for two main reasons: revenue fell when the economy collapsed, and the federal government stepped in to halt the economy’s decline.

The Recovery Act provided a mix of public investments and tax cuts for working families to give the economy a boost.  It extended unemployment insurance, food assistance, and health insurance for people who lost jobs, helping families get by while at the same time boosting economic activity by putting money in the hands of people who would spend it right away. 

This response was critical because the economy’s other engines were stalled. Consumer spending was sputtering because fewer jobs and declining home values meant less ability to spend, while business investment idled because demand was not there. Government was the only entity that could jump-start the economy and get it moving.

The Congressional Budget Office has confirmed that the Recovery Act created up to 3.6 million jobs and helped bring the official recession to an end.

While the economy is now gradually advancing, this recession was the most severe since the Great Depression. Getting to full speed will take time. At current rates of growth, the unemployment rate may not equal pre-recession levels until 2015 or later.

The 2011 budget that passed the House could bring growth to a halt by slashing spending while unemployment remains high. Extreme plans like those of Senator Rand Paul would drastically cut or eliminate funding for key areas like education, housing and energy.

In the short-term, the most important deficit is the jobs deficit, and plans to cut critical investments will only make that problem worse.  Elimination of necessary services would ripple through local economies and cost jobs.

We can and should enact legislation that will reduce the budget deficit once the economy is back on its feet. But one necessary ingredient to a lower long-term deficit is strong economic growth, which will require investment in education, infrastructure, clean energy and other areas. A deficit reduction approach comprised entirely of cutting needed investments will harm the future growth rate.

Plans to face the long-term budget deficit should focus on the real challenges. The largest contributor to the deficit in coming years is the continued high growth of health care costs. Health care has long been growing faster than the economy due to a range of factors including high administrative costs associated with our fragmented payment system, the growth of expensive medical technologies and an inefficient health care delivery system.

The Affordable Care Act passed last year is the first step in addressing those issues, and the Congressional Budget Office has confirmed that the bill will reduce the budget deficit. But additional reform will be needed in the future to make health care both more effective and more affordable.

We face an important decision over the expiration of the Bush-era tax cuts (now scheduled for 2012). We will also have to address reform of the tax system, including scrutiny of the estimated $1 trillion in tax preferences and loopholes that are buried in the tax code.

Kentuckians should be concerned about proposals to wantonly cut or arbitrarily limit investments needed for immediate economic recovery and long-term economic prosperity. We should be deeply troubled by radical plans like the constitutional amendment to prevent budget deficits that Senator Paul touted in a recent visit to the Kentucky legislature. That amendment would lock away critical tools the country needs to address future recessions.

Our approach must recognize the critical role of public investment in spurring job creation in tough times and building lasting prosperity in the future.    

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP). KCEP’s work is on the web at www.kypolicy.org.

Testimony on HB 318: Tax Reform

Kentucky Center for Economic Policy

Jason Bailey, Director

March 1, 2011

Thank you Mr. Chairman and members of the committee. My name is Jason Bailey, and I am Director of the Kentucky Center for Economic Policy.

Three strengths of HB 318:

First, it closes growing holes in our tax system by modernizing it to a changing economy and changing demographics.

The state’s own report identifies 287 tax expenditures that collectively result in about as much lost General Fund revenue as the state takes in each year. The bill begins to address that problem by eliminating deductions that disproportionately benefit the wealthy (as 14 other states do), expanding the sales tax to services in a targeted way, and phasing out the private pension exclusion at higher income levels—an exclusion that currently costs Kentucky $235 million and will cost more as the population ages.

Secondly, HB 318 looks for revenue where the ability to pay has increased the most.

It is among high earners that incomes have grown and federal tax cuts have been the largest. Over the last twenty years, the wealthiest 20 percent of Kentucky families saw their real incomes increase 41 percent on average. The poorest 20 percent of Kentucky families had no statistically significant change in their real incomes over that period.[1]At the same time, the extension of the federal tax cuts that Congress agreed to in December means that the highest-earning five percent of Kentuckians are receiving $1 billion in federal income tax cuts this year.[2]HB 318 asks more from those who have benefitted the most. But the net result of the bill is not to make Kentucky’s overall tax system progressive, or even flat. It just makes it a little less regressive than it already is.

Those tax increases will be partially subsidized by the federal government. Deductibility means those in the top bracket get a 35 cent federal tax decrease for every $1 increase in state taxes.

Thirdly, HB 318 supports economic recovery in the short-term and economic development in the long-term.

Recovery Act monies go away this summer, while the economy (and therefore revenue) still has a long way to go until it reaches pre-recession strength. In a short time this body will be crafting a new budget for the next biennium; those 22 states that have projected revenues for 2013 are showing continued serious budget shortfalls. If we will be crafting a tight budget in Kentucky as well, we should keep in mind that the strongest positive impacts on the economic recovery come from assistance to middle- and low-income families and from avoiding deep state budget cuts.

In the long run, states like North Carolina, which has grown as much as or more than any other in the South in recent years, have shown that dependence on a robust income tax coupled with adequate public investment can help rather than deter economic development.[3]HB 318 supports working families with lower marginal rates and an earned income tax credit. And by better aligning the tax system with future growth in the economy, the bill helps protect the investments Kentucky needs.

I urge you to pick up the conversation that HB 318 advances and lead the state in developing a tax reform package for the 2012 General Assembly that can move us forward.

Thank you for the opportunity to speak.