As wealth shifts, states struggle to tax rich, poor: reports

The growing concentration of income among the richest Americans has made it tougher for states to fund their budgets, because of the way most states fund public services, writes Gabriel J. Petek, San Francisco-based primary credit analyst for Standard & Poor's Rating Services.

On the one hand: Republican-run states like Texas and Florida, which tend to rely more on sales taxes, have seen revenues flat-line (compared to earlier increases) since 2000. That's because poor and middle-income people aren't buying any more, and rich people are more likely to save and invest (often out-of-state) than to use their higher incomes to buy more stuff locally.

On the other hand: Democratic-run states like California and New York, which rely more on income taxes, have been able to collect a higher proportion of rich people's higher incomes. However, the gravy train stalled in the recession of the late 2000s, and revenues went flat from that source, too, when the stock market dived -- a warning that income taxes are more volatile in rough economic times, and less steady than sales taxes when the investment markets dive.

Put anther way: With a "progressive tax structure" that charges rich people more than the poor, "it's possible to counteract much of the depressing effect inequality has on tax revenue growth rates" -- but this is no "panacea," because the added revenue won't be there in bad years when it's most needed, S&P concludes.

Indeed, several states that boosted taxes on the rich in the late 2000s -- including New Jersey, New York and Wisconsin -- have since elected officials who "reversed course, at least partly, and moved away from higher top marginal income tax rates," S&P adds.

Overall, inequality appears to be "dampening overall economic growth," perhaps because the broad mass of consumers are buying less, and rich people aren't necessarily increasing their in-state spending by a corresponding amount. That leads to "slower tax revenue growth no matter a state's tax structure," Petek wrote, concluding that "tax revenue growth slows as income inequality rises."

Separately, WalletHub, a Washington-based consumer credit data service owned by ex-Capital One Bank executive Odysseas Papadimitriou's Evolution Finance, in a new report cites data from the Institute on Taxation and Economic Policy (which generally supports higher taxes on higher incomes) showing that poor people (the lowest-income 20 percent of the people) as a group pay more than 10 cents of every dollar of their income to state and local governments through taxes, fees and other public charges -- while rich people in the top 1 percent pay only about 5 cents.

WalletHub lists Delaware, which has no sales tax, no municipal government (except in a few cities and towns) and a progressive income tax (higher for rich people), as one of the five "fairest" state tax systems -- by both "conservative" and "liberal" criteria.

WalletHub ranks New Jersey, with its graduated income tax, 20th fairest, and Pennsylvania, with its flat income tax, ranks 30th fairest, of the 50 states, overall.

Papadimitriou lists Texas and Florida among the states where rich people pay the least; New York and Illinois as large states where middle class people are most "overtaxed"; and Pennsylvania, Texas and Florida as states where poor people pay some of the highest taxes.