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Income Inequality Hurting State and Local Governments

We’ve long known that the growth in income inequality over the past 20 years is bad for working people.  Now there is evidence that it is also bad for state and local governments—and the public employees who work for them.   

In a report released this month, the credit rating agency Standard & Poor’s found that the annual growth rate of state tax revenue fell by more than 50% in recent years. S&P concluded that cause of the drop was increasing accumulation of wealth among the richest 1% percent. Because the wealthy tend to take a larger share of their income from investments that are taxed at a lower rate than ordinary wages, the shift of income from the middle class to the wealthy results in less taxes paid to state governments.

The Congressional Budget Office found that top earning 1 percent of households increased their income by about 275% after federal taxes and income transfers from 1979 to 2007, compared to a gain of just under 40% for the 60 percent in the middle of America's income distribution. S&P noted that the annual growth rate of state tax revenue fell from nearly 10% to 4% during the same period.

Since municipal budgets are often closely linked to state tax revenues, the nation’s fire fighters are feeling the brunt of this shift.  As state revenue shrinks, fewer resources are available for public safety personnel, equipment and training.

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