Wealth Gap Putting Squeeze on State Revenue

Epoch Times

Income inequality is taking a toll on state governments.

The widening gap between the wealthiest Americans and everyone else has been matched by a slowdown in state tax revenue, according to a report being released Monday by Standard & Poor’s.

Even as income for the affluent has accelerated, it’s barely kept pace with inflation for most other people. That trend can mean a double-whammy for states: The wealthy often manage to shield much of their income from taxes. And they tend to spend a lower percentage of it than others do, thereby limiting sales tax revenue.

As the growth of tax revenue has slowed, states have faced tensions over whether to raise taxes or cut spending to balance their budgets as required by law.

“Rising income inequality is not just a social issue,” said Gabriel Petek, the S&P credit analyst who wrote the report. “It presents a very significant set of challenges for the policymakers.”

Stagnant pay for most people has compounded the pressure on states to preserve funding for education, highways and social programs such as Medicaid. Their investments in education and infrastructure have also fueled economic growth. Yet they’re at risk without a strong flow of tax revenue.

The prospect of having to raise taxes to balance a state budget is a politically delicate one. The allure of low taxes has been used by states to spur job creation, by attracting factories, businesses and corporate headquarters.

“If you’ve got political pressure to spend more money and pressure against raising taxes, then you’re in a pickle,” said David Brunori, a public policy professor at George Washington University.”

Income inequality isn’t the only factor slowing state tax revenue. Online retailers account for a rising chunk of consumer spending. Yet they often manage to avoid sales taxes. Consumers are spending more on untaxed services, too. [MORE]