Pulling Apart: State Income Inequalities - Press Release

December 16, 1997

Pulling Apart:
A State-by-State Analysis of Income Trends - Press Release

STATE-BY-STATE REPORT FINDS INCOME INEQUALITY
GROWING IN 48 OUT OF 50 STATES SINCE LATE 1970s
Few States Experienced Broadly Shared Income Growth Despite Strong Economies

An analysis of income trends in each of the 50 states released today by the Center on Budget and Policy Priorities shows that income disparities between the top fifth of families with children and families at the bottom and middle of the income scale have grown substantially in almost every state over the last two decades. Moreover, despite the strong economic growth of recent years, income disparities now are significantly greater than they were at the comparable point in the business cycle during the mid-1980s.

Using the latest Census Bureau data, Pulling Apart: A State-by-State Analysis of Income Trends measures changes in income between high-, middle- and low-income families with children at similar points in the business cycle — from the late 1970s to the mid-1990s, and from the mid-1980s to the mid-1990s. The report's state-by-state assessment found a disturbing picture of widening disparities among income groups. Among the key findings:

Between the late 1970s and the mid 1990s, the incomes of upper-income families with children increased in every state. On average, incomes of the richest fifth of families increased by 30 percent, or nearly $27,000, after adjusting for inflation. In sharp contrast, incomes of the poorest fifth of families with children decreased in 44 states in this period. The decline in the real incomes of the poorest families with children averaged 21 percent, or $2,500.

The states where the gap between the highest income and lowest income families with children grew the most from the late 1970s to the mid 1990s are, in order: Connecticut, New York, West Virginia, Arizona, Kentucky, Pennsylvania, Oklahoma, Ohio, California, and Kansas.

As a consequence, the gap between high- and low-income families widened significantly in nearly every state. In the late 1970s, there was no state where the richest families had average incomes ten or more times larger than those of the poorest families. By the mid-1990s, 30 states had "top-to-bottom" ratios of 10 or greater.

In the United States as a whole, the Census data show that the poorest 20 percent of families with children had an average income of $9,250 in the mid-1990s, while the average income of families in the top 20 percent of the income distribution was $117,500, or 13 times as large. The states in which the gap between the incomes of the lowest-income and highest-income families with children is greatest are New York, Louisiana, New Mexico, Arizona, Connecticut, California, Florida, Kentucky, Alabama, and West Virginia.

The income gap between middle-income families and high-income families also increased between the late 1970s and the mid-1990s. By the mid-1990s, there were 40 states where the gap between the highest-income 20 percent of families and the middle 20 percent of families with children was larger than it had been for any state during the late 1970s. During the past two decades, the gap between high-income and middle-income families with children grew most rapidly in New York, Indiana, Arizona, California, Georgia, Connecticut, West Virginia, Texas, Pennsylvania, and Tennessee.

The long-term trend toward increasing inequality has continued over the past decade despite the sustained economic growth of recent years. In most states, progress was not made toward reducing income inequality between the mid-1980s and the mid-1990s. To the contrary, income inequality increased during this period in the large majority of states.

"Robust economic growth in recent years has done little to turn around the long-term trend toward increasing inequality," said Kathy Larin, co-author of the report and a policy analyst at the Center on Budget and Policy Priorities. "To the extent low- and middle-income families have made gains during the recent recovery, those gains generally have not made up for the income losses suffered by these families during the last recession."

The following are among the report's findings regarding income inequality between the mid-1980s and mid-1990s:

The income gap between the richest and the poorest families grew in 37 states, home to 86 percent of the nation's population, between the mid-1980s and the mid-1990s. In nearly half of all states, families in the bottom fifth of the distribution became poorer while families in the top fifth gained income.

Income disparities between the highest-income and lowest-income families widened the most between the mid-1980s and the mid-1990s in Arizona, Connecticut, New York, New Hampshire, California, Pennsylvania, Florida, Kentucky, New Mexico, and Kansas.

For middle-income families, income disparities widened in all but three states between the mid-1980s and the mid-1990s. On average across the United States, incomes of the middle 20 percent of families with children declined by $390, while the incomes of the highest-income 20 percent of families grew by $16,500.

"The report's data show that with few exceptions economic growth in the fifty states has not been broadly shared," said Elizabeth McNichol, a co-author of the report and director of the State Fiscal Project at the Center on Budget and Policy Priorities. "When similar points in the economic cycle are compared, it becomes clear that economic growth has been of, by, and for higher-income families. There have been few states where middle and low-income families caught a strong tide of income growth," McNichol said.

About the Data in the Report

The report is based on before-tax income for families with at least one child under the age of 18, from the Census Bureau's March Current Population Survey. The report compares "pooled" data from the three most recent years for which data were available — 1994, 1995 and 1996 — to pooled data from the late 1970s and the mid-1980s. Compared with examining one year of data, this method increases the sample size of the data and therefore its precision. Comparisons between the time periods chosen for the report are appropriate because the three periods all reflect similar stages in the economic cycle.

The Census data used in the report do not include capital gains income in its definition of family income, understating the incomes of the top fifth of families who receive most capital gains income. The Census data also does not reflect earnings above $100,000 for any one job, further understating income in the top quintile. The incomes of the bottom fifth also are understated since non-cash government benefits such as food stamps are not counted as income. In all, the report understates income disparities between the top and middle fifth, and, to a lesser degree, those between the top and bottom fifth.

Can States Change Course?

The report notes that fundamental changes in the U.S. economy are responsible for much of the growth in income disparities. For example, the loss of domestic manufacturing jobs and the decline of unionization have caused wages to stagnate or deteriorate among low- and middle-income workers. In turn, the demand for highly-skilled workers generated by advanced technology has resulted in a marked increase in wages of college graduates over those of high school graduates between the mid-1980s and mid-1990s.

"Government policies may not be able to reverse the economic forces that have increased income inequality," the report explains. "But it is possible for labor polices and government programs providing assistance to low-and middle-income people to influence the distribution of income and for tax polices to mitigate the effects on families of the pre-tax income distribution."

State and federal lawmakers, the report notes, should examine policies such as raising the minimum wage, strengthening unemployment insurance, implementing welfare-to-work initiatives, and reforming regressive state tax systems, to help mitigate the growing income divide. At the state level:

States should look to tax reform to help offset the income inequality. States looking to reduce taxes can focus their efforts on reducing regressive taxes that disproportionately burden low and middle-income families, such as sales taxes, rather than cutting more progressive income taxes. Similarly, states that must raise taxes should concentrate income tax increases on the most affluent. In addition, states can help shield the poor from being taxed deeper into poverty through the creation of low-income tax credits.

With the purchasing power of the minimum wage still 18 percent below its average value during the late-1970s, and federal action on a higher minimum wage uncertain, states should consider raising their own minimum wage.

As the new welfare law is fully implemented, more low-income recipients will face time limits and loss of cash assistance. Low-income families will be in particular danger during an economic downturn when lower-skilled workers will be the first to lose their jobs. States should emphasize strong job placement and training programs and the provision of transportation and child care services to help more low-income families make a successful transition from welfare to work.

The federal and state governments should work together to strengthen the unemployment insurance system, which has weakened in recent years. States can modify unemployment insurance rules in a number of ways, by covering more seasonal workers, including a moveable base period for eligibility and extending benefits during periods of high unemployment.

"Over the course of two decades since the late 1970s," the report concludes, "income growth has not been broadly shared among the populations of most states. Even the robust growth of the early to mid-1990s has not reversed the long-term trend. Both federal and state policies have contributed to the increasing gap in income, and both federal and state policies can be used to help mitigate or even reverse this trend in the future."

This report was issued by the State Fiscal Project of the Center on Budget and Policy Priorities, a national nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs, with an emphasis on those affecting low- and moderate-income households. The State Fiscal Project, which was founded in 1992, prepares analyses and provides technical assistance on state tax and budget issues. The Center on Budget and Policy Priorities is supported primarily by foundation grants.