Report: Income inequality slows state tax growth

Conservative groups critical of nonpartisan S&P conclusion.

The widening gulf between the rich and others likely has contributed to slower and more volatile growth in state tax collections, according to a recent report by a leading credit-rating agency.

Ohio’s tax revenue is growing at a much slower rate than it did in past decades, which is consistent with the national trend and corresponds with rising levels of income inequality, according to Standard and Poor’s.

Ohio, however, has one of the lowest levels of inequality in the nation, and it experiences less volatility in its tax collections compared to many of its U.S. counterparts, according to S&P analysts.

Extreme levels of income inequality can be a drag on economic expansion because wealthy households with climbing incomes tend to save more and decrease consumption, S&P wrote.

Meanwhile, lower-earning households have to take on more debt to sustain consumption levels, which doesn’t always work or last and can lead to economic swings, causing boom-and-bust cycles, the company said.

Some conservative-leaning groups said the conclusion is not supported by other research that indicates the relationship between inequality and economic growth is ambiguous.

However, it is notable that a major, nonpartisan financial forecasting company is analyzing the relationship between the slow-growth economic environment and the growing wealth gap, and basing predictions on these considerations, according to some researchers and academics.

“From an empirical point of view, they are trying to forecast whether (states) will be able to keep up and make particular types of payments on bonds that they put out their into the marketplace,” said Richard Stock, the director of the Business Research Group at the University of Dayton.

Ohio’s tax collections are growing, but at a far slower pace than in past decades, according to S&P data obtained by this newspaper.

Since 2009, the state’s tax revenue has grown at an average annual rate of 1.1 percent, the company’s data show.

That is down from 2.9 percent growth between 2000 and 2009, and 5.4 percent between 1990 and 1999.

Between 1950 and 1979, state tax revenue grew at an average annual rate of about 9.2 percent.

Volatility in tax revenue makes it difficult for states to produce accurate budget forecasts, which can lead to problems if expenditures and revenues do not align, the report said.

But the measures analyzed in the study suggest Ohio’s revenue situation is more stable than many other states, which corresponds with its fairly modest level of income inequality, said S&P analyst Gabe Petek, who worked on the report.

“The state has one of the least pronounced levels of inequality — in fact it’s the sixth lowest by the Gini coefficient,” Petek said, referencing a measure of income inequality based on the relationship between shares of income and shares of the population. “And, consistent with the takeaway from our analysis, Ohio also exhibits among the lowest levels of revenue volatility as well.”

The S&P report comes after the company announced in August it is lowering its forecast of the nation’s economic growth, citing income inequality as an impediment.

Consumer spending accounts for a large part of the economy, and demand for goods and services relies on the purchasing power of the public, according to some policy researchers.

The uneven distribution of income is a hindrance because rich people spend a smaller share of their income than the less wealthy, and demand for goods and services decreases when all the income gains go to the very top, said Amy Hanauer, the executive director of Policy Matters Ohio, a liberal-leaning research group.

This happens because the wealthy do not and cannot spend enough to make up for flat or decreased spending by lower- and middle-class people, who are being forced to respond to stagnant wages, she said.

Incomes of the wealthy are more volatile than everyone else because they are more likely to come from capital rather than labor, and stock market investments and assets are more prone to fluctuation than wages, said UD’s Stock.

He said instability in tax revenue threatens to hurt public investments that help economic growth, such as public infrastructure improvements and financial assistance for higher education.

Stock said the state’s tax structure is becoming increasingly regressive, since it is relying more heavily on sales tax. The S&P report found that the negative impact of income inequality on tax revenue growth is stronger in states that rely more heavily on sales taxes.

But the methodology S&P used for its report is problematic, because the company chose to measure tax growth over specific decades, including between a peak economic year (2000) and a terrible one (2009), said Rea Hederman Jr., the executive vice president of the conservative-leaning Buckeye Institute.

Measuring the tax growth between a high and a low point and comparing it to prior periods can be misleading, he said. He said the company’s thesis that income inequality is causing slower growth and slower tax revenue is inconsistent with the data.

“So far, there doesn’t seem to be any evidence to say income inequality harms growth,” he said.

Hederman said economic mobility — people’s ability to climb the economic ranks — is far more important than inequality, and research suggests upward mobility is the same today as it was 40 years ago.

Hederman, however, concurs with the report’s finding that inequality creates volatility in state tax revenues.

He said that suggests that states should not heavily rely on tax revenue from the top earners, because it puts their finances seriously at risk during downturns and stock market crashes.

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