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State governments may be expanding wealth gap

Thursday, June 5, 2014 | 1:16 p.m. CDT; updated 4:18 p.m. CDT, Thursday, June 5, 2014
Amy Jennewein speaks during a rally in support of raising the minimum wage in University City on April 25. Jennewein, who lives in House Springs, earns a little above Missouri’s $7.50 minimum wage at one of her jobs and nearly $11 an hour at the other. Raising minimum wage is one way states can help bridge the wealth gap in the U.S.

JEFFERSON CITY — Lawmakers in many states have been trying to boost their post-recession economies by cutting income taxes, curbing aid to the long-term jobless or holding down the minimum wage. Some have pursued all of these steps.

Whether such policies will spur businesses to expand as hoped isn't yet clear. But collectively, the actions could ease the financial burden for the states' most affluent residents while reducing the safety net for those at the bottom.

What is income inequality?

Income inequality is a hot topic politically these days. If you'd like to take a step back and read about what it is (and whether it's bad), check out this coverage from Vox, a  national news website.



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The shift may also contribute to a trend that is prompting growing national concern: the widening gap between the richest Americans and everyone else. The divergence has developed over four decades and accelerated in recent years.

Economic statistics show that incomes for the top 1 percent of U.S. households soared 31 percent from 2009 through 2012, after adjusting for inflation, yet inched up an average of 0.4 percent for those making less. Many economists are sounding alarms that the income gap, greater now than at any time since the Depression, is hurting the economy by limiting growth in consumer spending.

Yet those concerns aren't resonating in some states. Last year, at least 10 states passed income tax cuts targeted at businesses or those in the top individual brackets. Several more already have cut taxes this year, including Democratic-led New York and Republican-led Oklahoma. Yet over the past three years, nearly one-fifth of the states have pared back unemployment benefits, and more cutbacks are under consideration.

The theory is that business owners are more likely to hire, expand and drive economic growth when their own financial burdens are eased. But others contend that formula comes with side effects.

"What's happening at the state level is increasingly important, and, to many eyes, it appears to be moving things in one direction — towards greater inequality," said Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a Washington-based tax research group.

The once-obscure income gap has become an issue in the 2014 elections as Democrats and Republicans differ over the best way to ensure America fulfills its promise as a land of opportunity.

Economists point to a variety of factors contributing to the gap, from the shift toward foreign manufacturing to a growth in single-parent households. Federal policies also come into play.

But state governments also have an impact.

Since the mid-1970s, states as a whole have cut their top individual income tax rates by nearly one-fourth, while boosting state sales tax rates by almost half, according to an Associated Press analysis. That has meant lower taxes for those earning the most and a bigger proportionate tax bite for those who spend more of their income on retail sales. Vermont, for example, has cut its top personal income tax rate from 17.5 percent to less than 9 percent while doubling its sales tax rate to 6 percent.

At the same time, states have scaled back some of the aspects of the financial safety net that keep low-income people out of poverty. The inflation-adjusted value of state welfare payments has been dropping in every state except Maryland and Wyoming and — even with federal food stamps included — leaves recipients below the poverty level in all states.

A divorced mother of three, Amy Jennewein came to the Missouri Capitol earlier this year imploring lawmakers to raise the minimum wage from $7.50 an hour to $10. Instead, the Republican-led legislature voted to gradually cut the top individual income tax rate from 6 percent to 5.5 percent and referred a three-quarter cent sales tax increase to the ballot. It also curbed unemployment benefits.

"The middle class is disappearing — that's what it feels like," said Jennewein, who works two jobs at a preschool and a grocery store to support her family at a poverty-level income. "Every single day, I feel it's getting worse instead of getting better."

As the safety net shrinks, the chance that residents will be impoverished at some point has grown. The percentage of people ages 35-45 experiencing poverty rose by one third during 1988-2008 compared with the previous two decades, according to research by Mark Rank, a social welfare professor at Washington University in St. Louis.

"Folks are getting less in terms of redistribution on the bottom end, and folks are getting more in terms of tax cuts on the top end," Rank said.

The last time the income gap was this wide was in the Roaring '20s, when government did little to redistribute income. That changed after the Great Depression, when many states began using income taxes to improve public education, prevent poverty and add services to boost the quality of life.

But business groups began protesting their growing share of the burden.

In Missouri this year, business leaders stood beside GOP lawmakers at news conferences before they enacted an income tax cut with a special break for many business owners.

Jack Lonsinger, who employs about 20 people at a carbon recycling business near Kansas City, said he would put the eventual tax savings toward the purchase of new equipment.

"We use the money we get back to invest — it's nothing we're going to stick in our pocket," he said.

Income inequality among households has grown by 13 percent over the past several decades in Missouri. But state officials who are pushing for tax cuts said they aren't seeking to exacerbate the gap and, in some cases, weren't aware of it.

"The ultimate goal is to increase our state's economy and get it flowing in a better direction," said Missouri Sen. Mike Kehoe, a Republican.

The debate over the impact of reducing taxes on economic growth is long running and unresolved. Although taxes are a factor in business expansions, the cost and availability of skilled labor and good transportation systems often are rated as more important. An analysis for the nonpartisan Congressional Research Service in 2012 found that reductions in top tax rates have had "little association" with investment or economic growth.

Associated Press writer John Hanna contributed to this report from Topeka, Kan.


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Comments

Mike Martin June 5, 2014 | 1:45 p.m.

One of the dumbest non sequiturs ever adopted by my peers in the media is this wholly fallacious idea that government can serve as some kind of "income equalizer."

Forget it. Not gonna happen. Never has. The only thing government does -- in its capacity as tax raiser or tax reducer, safety net provider or safety net destroyer -- is to increase income inequality, primarily through two channels most reporters ignore:

1) Tax revenues spent on crony capitalism and corporate welfare

2) Tax revenues spent on management salaries/perks, fancy buildings, and non-performing government assets

Raising taxes on anyone, wealthy or otherwise, will not reduce income inequality. Lowering all taxes on everyone and reducing the size, scope, and grasp of government will reduce income inequality.

The first government programs to be cut should be any and everything associated with corporate welfare at every level -- city, county, state, Fed.

From Federal ag subsidies to local TIFs and buying overpriced land from well-connected developers for $80 million high schools, government has become a reverse Robin Hood, robbing from the poor and middle income and giving to the rich. It is the primary cause of income inequality on the globe today. Anyone who thinks differently is buying too much BS from too many politicians.

(Report Comment)
Ellis Smith June 5, 2014 | 3:03 p.m.

@ Mike Martin:

Bravo! One current criticism of the "wealthy" is that they are sitting on their money rather than making investments. That plays well in some quarters, but it begs a question: if the money were YOURS, YOU might be sitting on it as well! When government acts as it has recently, it's natural for individuals and businesses to be hesitent about investment and expansion.

I'd characterize the present administration as being less truly "bad" than simply "indecisive," but the latter creates its own problems. Whether it's the financial markets or other ventures, uncertainty ALWAYS causes caution for responsible investors.

As for the utopian concept of equal wealth, there's plenty of evidence that while it should be desirable to reduce gross inequality, the equalized wealth concept isn't going to happen.

There was some nut job whose first name was "Karl." Remember him? An experiment using his ideas, attempted in the Union of Soviet SOCIALIST Republics, turned out to be an unqualified disaster. Who ended up financially superior to all others? The party hacks, of course, while they continued to preach financial equality.

Are those you cite REALLY that naive, or is it that they think all Americans are?

Got to go. I'm joining the search to see if there are still any Kulaks out there. Imagine having the nerve to have six more chickens or one more cow than your neighbors. Scandalous!

(Report Comment)

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