Random Listicle: 5 takeaways on income inequality and state revenues

by Jordan Green

1. The 1 percent for the 99 percent

The investment-rating agency Standard & Poor’s released a report on Monday finding that “income inequality is undermining the rate of state tax-revenue growth.” For those of us who watch every penny we spend on groceries and run up credit-card debt to cover our monthly household expenses, this won’t be earthshaking news. But for it to come from S&P amounts to the 1 percent acknowledging the agenda of the other 99.

2. Echoing Stiglitz

To underscore this point, the report echoes The Price of Inequality, economist Joseph Stiglitz’s manifesto for the Occupy movement. To wit: “Our interpretation… is that beyond a certain point, rising income inequality is a macroeconomic factor that acts as a drag on growth. There is evidence, although not conclusive at this point, that the higher savings rates of those with high incomes cause aggregate consumer spending to suffer. And since one person’s spending is another person’s income, the result is slower overall personal income growth despite continued strong gains at the top.”

3. Income vs. sales tax

The negative effect of income inequality was more adverse in states that are dependent on the sales tax as opposed to the income tax, the report found. That bodes well for North Carolina, one of the 10 most income tax-dependent states in the nation. The report concluded, “This suggests that through a progressive tax structure, it’s possible to counteract much of the depressing effect income inequality has on tax revenue growth rates.”

4. The California solution

S&P found that from 1980 to 2011, average annual state tax-revenue growth fell from 10 percent to 4 percent, while the share of total income for the top 1 percent earners doubled over the same period. It seems logical that if the super rich are corralling an ever-greater share of wealth, they should pay more taxes for the roads, hospitals and universities that we share. “In a setting of rising income inequality, the move towards more progressive tax rates may help states generate faster tax revenue growth than would flatter tax regimes,” the S&P report suggested. “In California, the Legislative Analyst Office has indicated as much.” While incomes for the top quintile in California have increased by 75 percent since 1993, earnings for the bottom four quintiles have dropped between 2.9 and 9.3 percent. The share of the tax burden carried by the 1 percent in California has increased commensurately from 33 percent to 51 percent.

5. The North Carolina way

While state tax revenues in California have grown by 7.2 percent since 2009, North Carolina has seen anemic growth of 3.7 percent. But North Carolina lawmakers apparently don’t find the California model very appealing. Instead of raising rates on top earners, they voted to replace North Carolina’s three-tiered system with a flat rate last year. Coupled with a move to allow the Earned Income Tax Credit to expire and eliminating a program to allow families a deduction for college savings accounts, the budget amounted to a transfer of wealth from the poor to the rich. As the Associated Press reported, “The [North Carolina] Legislature’s Fiscal Research Division estimated last year that a married couple with two children earning $20,000 a year that received a $222 EITC rebate in 2013 would instead have to pay $40 this year. In comparison, a married couple with two children making $250,000 will get a $2,318 tax cut in 2014, according to the analysis.” How’s that working out for us?