Income Inequality Hinders State Revenue Growth

According to a report by Standard $ Poor’s, income inequality and the widening gap between the wealthiest Americans and the rest of the population has been matched by a decrease in state tax revenue.

Although income for the affluent has accelerated, it has yet to keep pace with inflation for most other people.  This trend can be devastating for states as the wealthy usually manage to shield much of their income taxes and tend to spend less of it than others, therefore limiting sales tax revenue. 

Because of this problem states face tensions over whether to raise taxes or cut spending to balance their budgets.  “Rising income inequality is not just a social issue . . . It presents a very significant set of challenges for the policymakers.”

Some states are now scrambling for new sources of revenue.  Pennsylvania has raised fees for vanity license plates and other auto expenses.  Colorado and Washington legalized recreational marijuana, in part on the promise that the proceeds would be taxed. 

See Associated Press, U.S. Wealth Gap Putting the Squeeze on State Revenue, AZ Central, Sept. 14, 2014.