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Wealth Gap Siphoning Money from Public Services

"Inequality is fundamentally an economic problem," S&P analysts say

This chart shows the connection between income concentration and annual percentage change in state tax revenues. (Standard & Poor's)

Rising income inequality is undermining state tax revenues, according to a Standard & Poor’s report released Monday, hindering states' abilities to fund education, infrastructure, and social programs while weakening the rate of economic recovery overall.

The report, "Income Inequality Weighs on State Tax Revenues," found that in the 31-year span from 1980 through 2011, the portion of total income going to the top percentile doubled from about 10 percent to more than 20 percent. Meanwhile, during the same time period, the annual average rate of state tax revenue growth declined by half, to below 5 percent from nearly 10 percent.

More rich people does not mean there's more wealth to spread around.

"Even as income for the affluent has accelerated, it's barely kept pace with inflation for most other people," the Associated Press reports. "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."

Sales tax revenue—which has also taken a hit from the online retail boom—accounts for 30 percent of all state revenue, according to the National Conference of State Legislatures, with personal income tax accounting for another 36 percent. The remainder comes from excise taxes (on gasoline, cigarettes and alcohol); corporate income and franchise taxes; and taxes on business licenses, utilities, insurance premiums, severance, property, and several other sources.

That money, in turn, is spent on public schools, highways, Medicaid, and a wide array of public services.

The S&P report declares the problem is macroeconomic and structural. "[O]ur findings indicate that inequality is fundamentally an economic problem—with fiscal implications for states," it reads. "That makes it unlikely that states can fully correct for it, even from solely a budgetary perspective, by adjusting their tax policies."

The researchers did find, however, that states which rely on sales tax are more negatively affected by income inequality than those that are income-tax reliant. The report also suggests that progressive tax policies can help ease the slowdown in revenue growth.

Monday's analysis builds on an S&P report from earlier this summer, which said income inequality is hindering U.S. economic growth and weakening the country's ability to recover from the Great Recession.

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