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U.S. State-Level Inequality: On a Steady Rise

Research & Commentary
November 27, 2012


Almost every single U.S. state has seen a significant growth in income inequality since the late 1970s, documents a new study from two leading Washington, D.C. think tanks. But states, the study stresses, can take equalizing action even if the federal government doesn’t.

By Philipp Babcicky

Rising inequality in the United States has become old hat. We all know that the nation, as a whole, has become less equal over the past four decades. Now a new report from the Center on Budget and Policy Priorities and the Economic Policy Institute shows that inequality has also been growing — since the late 1970s — in almost every individual state.

The report, Pulling Apart: A State-by-State Analysis of Income Trends, shows that while high incomes have increased steadily in most states, middle and low earners have seen their incomes stagnate or increase only modestly.

The 2007-2009 recession accelerated these trends. Real incomes at all levels did decline during the crisis. But the wealthy now see their incomes growing again. Middle and low income households, on the other hand, have seen little or no improvement.

For the United States overall, the bottom fifth of households earn an average of $20,510 while the top fifth earn an average of $164,490. The income of the top fifth is running almost exactly eight times the income of the bottom fifth. This gap has widened through more than 30 years of consistently rising inequality.

Back in the late 1970s, the top-to-bottom ratio stood at less than eight times in every single state. Today, 15 states have gone over this eight times ratio. The states with the largest disparities: Arizona, California, Georgia, New Mexico, and New York.

The real story starts to emerge if we look at the top 5 percent of households. Nationally, the top 5 percent make on average 13.3 times as much as the bottom fifth. In some states the gap is running even larger. In California, Georgia, New Mexico, and New York the top 5 percent make 15 times more than the bottom fifth.

In Arizona, the top 5 percent make more than 17 times as much as the bottom fifth, making Arizona the state with the largest top-to-bottom gap in the United States.

The income gap rates may differ from one state to another, but the well-off are pulling away from the poor and middle in every state. If Americans are going to put an end to rising inequality, states clearly can’t wait until the federal government takes decisive action.

Eighteen states already have a higher minimum wage than the federal minimum of $7.25 an hour. Higher minimum wages tend to reduce inequality. States with higher minimum wages, a 2006 study from the Fiscal Policy Institute showed, also have historically had faster job growth.

Other state policies can also reduce inequality. The Center on Budget and Policy Priorities suggests that states can reduce inequality by improving their unemployment insurance systems and making their state tax systems more progressive.

States also could tackle inequality by targeting tax credits to low-income households or by raising exemptions and deductions.

But recent tax changes in a number of states have largely benefited the wealthy. Cuts to top income tax rates and taxes on capital gains have actually made many state tax systems more regressive.

The wealthy are pulling away from the rest of America in all parts of the country. But even without federal action, states have plenty of  tools at their disposal they can use to narrow inequality and improve the lives of their citizens.

Philipp Babcicky is a PhD student at the University of Graz and a research assistant with the Department of Sociology and Social Policy at the University of Sydney.

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