The increase in income inequality in the U.S. is weighing on state tax revenue nationwide, contributing to a reduction in revenue for some states and a volatile collection picture for others, Standard & Poor's Ratings Services said.
"We find that increasing income inequality is undermining the rate of state tax revenue growth, particularly for states reliant on sales-taxes," said Standard & Poor's analyst Gabriel Petek. "In addition, it is contributing to volatility in tax revenue for states reliant on personal income taxes from top earners, which are often tied to the financial markets."
The report notes that states generate the bulk of their revenue from taxes levied on current economic activity, namely personal income and consumption. Top earners tend to save more and spend less, which can crimp revenue for states that are reliant on sales taxes, the report said. This income bracket also tends to earn more income from investments, which creates an uncertain tax collection picture for state budgeters.
The report says that from 1980 to 2011, average annual state tax revenue growth fell to 5% from 10%; meanwhile, the share of total income for the top 1% of earners doubled. "Inequality appears to be a macroeconomic problem with fiscal implications for states," Petek said. "In other words, because it is a structural economic problem, states are unlikely to be able to fully correct for it solely by adjusting their tax policies."
Key findings of the report include: a one-unit increase in the share of income going to the top percentile of earners had a negative impact on state tax revenue growth; structural, rather than cyclical, forces are leading to slower state tax revenue growth; states that rely on sales-tax collections see reduced revenue as top earners save more and do not spend into the economy; state tax revenue trends have also become more volatile for progressive-tax states that have come to rely more heavily on capital gains from top earners; and it's unlikely that states can fully correct for these declines and increased volatility solely by adjusting their tax policies.
The top 10 income-tax states are: Oregon, Virginia, New York, Massachusetts, Georgia, Connecticut, California, Colorado, Missouri, and North Carolina.
The top 10 sales-tax states are: Florida, Washington, South Dakota, Texas, Nevada, Tennessee, Hawaii, Mississippi, Arizona, and Indiana.
