Rising Income Inequality Linked To State Tax Revenues Decreasing

The gap between the poor and the wealthy is usually thought of as a social issue.

But a new report by the Standard & Poor's agency shows that it is also wreaking havoc on state budgets, as that widening chasm is matched by a slowdown in tax revenues.

That's because while the wealthy make more money, they are also more effective at shielding their income from taxes while the less affluent are paying less in taxes as their incomes stagnate.

Gabriel Petek, a credit analyst at Standard & Poor's who authored the report, joins Here & Now's Robin Young to discuss the trend.

On how income inequality contributes to a decline in tax revenue

"It's causing state tax revenues over time to grow more slowly and at the same time to become more volatile."

"The slower growth probably reflects less purchasing power by the vast majority that have flat or even declining wages. And the volatility is a function of the fact that states have become increasingly dependent of people at the very top end, that get a lot of their income from investments in the financial markets. And as we know those can go through a lot of fluctuation and turmoil, and that translates directly to state budgets in the form of revenue volatility.

"And really that's a very challenging problem for states when it comes to setting their annual budgets."

On what states can do to address income inequality

"States with higher levels of education have shown less income inequality, so one strategy for a state might be to pursue an objective of raising the overall education level throughout that state.

"Now that would take a long time, you're talking about a generational type of change. But at the same time, this problem that we're discussing has been a long time in the making. So however they approach it, we think it's unlikely it will change anytime in the near future."