While a new report about income inequality and state budgets is receiving a great deal of attention, the most important question typically goes unasked: How much money do states need?
A report from credit-rating agency Standard & Poor’s suggests that a widening gap between the wealthiest Americans and the average Americans is adversely impacting state tax revenue. As the Associated Press explained: “Even as income for the affluent has accelerated, it’s barely kept pace with inflation for most others. 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 less of it than others do, thereby limiting sales tax revenue.”
This trend is noteworthy in Washington, which is especially reliant upon sales tax by dint of having no state income tax. The S&P report demonstrates limited tax growth for the states that are most dependent upon sales tax, a list that includes Washington. The state sales tax is 6.5 percent, which accounts for 45 percent of the overall state budget. In addition, local municipalities may add their own sales tax on top of that figure.
Oregon, on the other hand, is especially dependant upon its state income tax, as there is no sales tax. Oregon relies upon income tax for nearly 70 percent of its state revenue — the highest figure in the country.
All of this is meant simply to provide some background. The gist of the Standard & Poor’s report is that many state governments are struggling to demonstrate revenue growth, and part of the reason for that is income disparity. Which brings us back to the seminal questions: How much is enough? And why is government addicted to increasing spending?
According to the Washington Policy Center, the state operating budget for the 2001-03 biennium was $44.9 billion. That rose 7.7 percent for the 2003-05 biennium, then saw a 12 percent increase each of the next two budget cycles. Once the Great Recession hit, there was small growth for the 2009-11 and 2011-13 budgets, but the 2013-15 outlay has a robust increase. For their part, state officials did plenty of belt-tightening during the economic downturn, as the number of full-time equivalency state employees dropped 5.6 percent from the 2007-09 biennium to the 2011-13 cycle.
Despite that, there will be pressure on next year’s Legislature to raise taxes. The state Supreme Court has mandated that lawmakers must fully fund K-12 education, which carries a price tag of roughly $3 billion, and they must increase the number of psychiatric beds for mental health patients. In addition, there is a dire need for major transportation spending, which has been left on the back burner over the past several legislative sessions. As David Brunori, a public policy professor at George Washington University, told the Associated Press: “If you’ve got political pressure to spend more money and pressure against raising taxes, then you’re in a pickle.”
With that in mind, the Standard & Poor’s report does include some eye-opening statistics. For example, of the dollars earned by Americans in 2012, more than 22 percent went to the wealthiest 1 percent of individuals — a share that has more than doubled since 1979. In Washington, that likely will result in increased calls for a state income tax, an idea that always has some supporters but likely would be shouted down by a majority of residents. That’s because, before we discuss ways for the state government to increase its revenue, first we must question how much is necessary.