Wall Street says high inequality, Walker Way is hurting state budgets

As a former resident of the Hoosier State, I found this article of interest today. Indiana has a 7% statewide sales tax rate, with local sales taxes pushing that number as high as 9% in cities like Indianapolis, and the S&P report indicates that this fact has led to a lot of fiscal pressure in the state over the last 35 years.

That sales tax is Indiana's largest source of revenue. But it is tied to consumer spending, and Americans have become increasingly reluctant to spend as median incomes have remained virtually stagnant over the past 30 years.

"It's by the far the largest source of revenue for the state, and it's so economically sensitive that if the economy's not doing well, it shows up pretty quickly in the state's revenue," said John Ketzenberger, president of the Indiana Fiscal Policy Institute.

The S&P report said Indiana's overall tax revenue grew by an average of 9.29 percent a year between 1950 and 1979 — the year that the gap between the most affluent Americans and the rest of the nation began growing.

Indiana's average annual tax revenue growth has fallen every decade since, dropping to 4.35 percent between 2000 and 2009, the report found. Annual revenue growth has fallen even lower since 2009, to 3.24 percent.

The S&P report was just released today, and you can take a look at it yourself by clicking here. The upshot of the report is that many states are quite dependent on sales taxes to raise their revenues, and because of increasing inequality and a higher share of income going to the rich, state tax revenues aren’t as likely to increase as much as economic growth would indicate it would. This is because the rich are less likely to spend as much of their money from increased income as the middle and poorer classes.

In addition, S&P stated that states with higher amounts of income going to the 1% were less likely to see the fruits of that growth.

Our regression model measured the annual percentage changes in state tax revenues since 1980 for the 50 individual states as reported by the U.S. Census Bureau. The independent variables included the following for each state:

•Income concentration in the top percentile (measured by the share of total adjusted gross income going to the top one percentile), (2)
•Annual rate of total personal income growth, and
•Annual percentage change in the state coincident economic indicators index (a summary of four main statistics), compiled by the Federal Reserve Bank of Philadelphia. (3)

As expected, the results from this regression analysis found a positive relationship between changes in both overall personal income and the coincident economic indicators index and state tax revenues. Regarding the income inequality measure, we found a negative relationship, consistent with our hypothesis…. That is, a one-unit increase in the share of income going to the top percentile had a negative impact on tax revenue growth, holding personal income growth and the state coincident economic indicators index constant. All of these findings were statistically significant at the 1% level.

S&P also compared the effect on tax revenues between states with the top 10 income tax rates, and the top 10 sales tax rates. What they found is that the effect of “more money to top 1% = lower tax revenue” is nearly three times larger in high sales tax states than in high income tax states. On the flip side, the high income tax states seem to get a larger revenue benefit from higher personal incomes and general economic growth. In S&P's study, 0% income tax states like Florida, Washington and Tennessee have had lower increases in revenues since 2000 compared to the 10 states that are most dependent on income tax for revenues. Indiana has also lagged those income tax-reliant states for revenue growth since 2009, despite the Hoosier State's strong rebound in jobs due in part to the Obama Recovery being especially strong in the Midwest (well, except for Walker's Wisconsin).

With that in mind, it is interesting that red states have pushed higher sales taxes as a way to offset income tax cuts they’ve laid on in recent years, with the argument being that a better economy (through lower income taxes and trickle-down) will raise sales, and therefore offset the income tax cuts. This S&P report shows the exact opposite to be true – especially if the gains from any growth go to the top 1% (as they have been more likely to do as income taxes on the rich have been lowered over the last 35 years).

Keep this in mind when you hear Scott Walker’s insane promise of expanding the current tax cuts if Wisconsin voters are foolish enough to give him a second term. There's not any room for tax cuts with a $1.8 billion budget deficit caused by Walker's earlier income tax cuts anyway, but further income tax breaks would likely be offset by higher sales taxes and other ALEC-like revenue gimmicks. Remember last December when the Walker Administration floated an idea about reducing Wisconsin income taxes to 0%, and people realized that it meant the sales tax rate would have to be raised to 13%? You can bet a version of that is being cooked up in the backrooms of Walker’s fiscal policy team (also known as the members of Wisconsin Manufacturers and Commerce and ALEC).

Maybe we should ask about that, after Walker’s silly pose of a “jobs plan” got released over the weekend – basically a lot of whining about Jim Doyle and doubling down of the same failed policies that led to the worst job growth in the Midwest from 2011-2013 and the growing budget deficit that we see today. Because the Walker Way would likely make our growing fiscal deficit even worse and leave the state in a position to have its debt downgraded, it would then mean drastic cuts with the selling of state assets to make up the difference resulting from such a revenue shortfall.

Oh wait, drastic service cuts and the selling off state assets to campaign contributors investors IS part of the ALEC plan. So maybe the Walker folks aren’t that naïve that they still buy into trickle-down after 35 years of evidence shows income tax cuts do not increase revenue. Maybe they’re just that cynical that they think the rubes will fall for their BS, while they and their allies steal their way out of town with a whole lot of our cash in their pockets.