What's Really Draining State Money?

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted July 8, 2009.

That would change. Over recent decades, with more and more income and wealth concentrating at the top, those uninterested in public services have had the resources to do more than grumble about taxes. They’ve been able to bankroll campaign after campaign, in state after state, to roll taxes back.

Growing inequality has helped these campaigns succeed. With the economy’s rewards flowing to the top, and essentially the top alone, Americans in the middle have found their wages and salaries stagnating, even sinking. Tax cuts, for many in the middle, have come to seem the only way to make ends meet.

These tax cuts, once in place, start states on a nasty downward cycle. Tax cuts mean less state revenue. The lower the revenue, the fewer the dollars available for maintaining quality public services. The lower the quality, the greater the number of people who find themselves actively considering private service alternatives.

Soon the modestly affluent, not just the rich, feel better off going life on their own nickel — better off joining a private country club, better off sending their kids to private school, better off living in a privately guarded gated development.

The greater the number of affluent people who forsake public services, the more inevitable still more service cutbacks become — even in “good” economic times, as the Center for Budget and Policy Priorities and the Economic Policy Institute noted last year in Pulling Apart, a detailed look at growing state-level inequality.

“Wealthy families that can afford private schools for their children can lose sight of the need to support public schools,” that study observed. “As a result, support for the taxes necessary to finance government programs declines, even as the nation’s overall ability to pay taxes rises.”

In not one state, the Pulling Apart study found, has inequality meaningfully declined since the 1980s. In 36 states, the study notes, “the income gap between the average middle-income family and the average family in the richest fifth has widened significantly.”

And the gains this top fifth has registered, the study stresses, have been “especially rapid at the very top of the income scale.”

Taxing this “very top,” the Center for Budget and Policy Priorities noted this past April in a follow-up report, could help states close their budget gaps. Even the tiniest of tax increases on the rich could have a sizeable impact.

“Nationwide,” the Center observes, “some $8 billion could be raised if every state with a personal income tax enacted a 1 percent rate increase on households making more than $500,000 a year.”

Some states have moved in that direction. Lawmakers in other states, incredibly enough, are still trying to go the opposite way. In Arizona, legislators last week pressed the governor to accept a “flat tax” that would actually lower the top state income tax rate on the wealthy, from 4.5 to 2.8 percent.

America’s states, in the weeks ahead, will all eventually “solve” their current fiscal shortfalls, mostly with still more cuts in public services. But the underlying state fiscal squeeze will remain. The end of the recession, whenever that comes, won’t end this squeeze. To become less unstable, states are going to have to first become less unequal.

See more stories tagged with: states, economy, inequality, money, recession

Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.

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