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

PDF of this report (74pp.)

April 9, 2008

I. Executive Summary

A state-by-state examination of trends in income inequality over the past two business cycles finds that inequality has grown in most parts of the country since the late 1980s. The incomes of the country’s highest-income families have climbed substantially, while middle- and lower-income families have seen only modest increases.

In fact, the long-standing trend of growing income inequality accelerated between the late 1990s and the mid-2000s (the latest period for which state data are available).

  • On average, incomes have declined by 2.5 percent among the bottom fifth of families since the late 1990s, while increasingby 9.1 percent among the top fifth.
  • In 19 states, average incomes have grown more quickly among the top fifth of families than among the bottom fifth since the late 1990s. In no state has the bottom fifth grown significantly faster than the top fifth.
  • For very high-income families — the richest 5 percent — income growth since the late 1990s has been especially dramatic, and much faster than among the poorest fifth of families.

Similarly, families in the middle of the income distribution have fallen farther behind upper-income families in many states since the late 1990s:

  • On average, incomes have grown by just 1.3 percent among the middle fifth of families since the late 1990s, well below the 9.1 percent gain among the top fifth. Income disparities between the top and middle fifths have increased significantly in Alabama, California, Florida, Illinois, Mississippi, Missouri, New Mexico, and Texas. Income disparities did not decline significantly in any state.

The benefits of economic growth were broadly shared for a few years in the late 1990s — the only period in the past two decades for which this was true — but this broad-based growth ended with the 2001 downturn. Once the effects of the recession were left behind, the trend toward greater inequality quickened, as the incomes of the richest families climbed while those of low- and moderate-income families stagnated or declined.

Methodology

This analysis uses the latest Census Bureau data to measure post-federal-tax changes in real incomes among high-, middle- and low-income families in each of the 50 states between the late 1980s, the late 1990s, and the mid-2000s — similar points in the business cycle (“peaks”).

In order to generate large enough sample sizes for state-level analysis, the study compares combined data from 2004-2006 with data from 1987-1989 and 1998-2000. The study is based on Census income data that have been adjusted to account for inflation, the impact of federal taxes, and the cash value of food stamps, subsidized school lunches, housing vouchers, and other government transfers, such as Social Security and welfare benefits.

Realized capital gains and losses are not included, due to data limitations. As a result, our results show somewhat less inequality than would be the case were we to include realized capital gains.

In this analysis, changes in income inequality are determined by calculating the income gap — i.e., the ratio between the average family income in the top fifth of the income spectrum and the average family income in the bottom fifth (or the middle fifth) — and examining changes in this ratio over time. These changes are then tested to see if they are statistically significant.

States fall into one of two categories: (1) those where inequality increased (that is, the ratio increased by a statistically significant amount), or (2) those where there was no change in inequality (the change in the ratio was not statistically significant). It also would be possible for a state to fall into a third category — states where inequality decreased by a statistically significant amount. In this analysis, however, no state experienced a decline in income inequality.

Specifically, real wages for low- and moderate-income families grew more slowly in 2002 and the first part of 2003 and then began to decline; on average, they are now the same or lower than they were in 2001. The highest-income families also saw declines in real income during the 2001 downturn (due both to the broad sweep of that recession in the job market and to the loss of realized capital gains), but their incomes grew rapidly once they recovered from these losses. The federal tax cuts of the early 2000s, which were targeted primarily on wealthy families, helped widen the income gap between the wealthiest families and those with low and moderate incomes.

An examination of income trends over a longer period — from the late 1980s to the mid-2000s — shows that inequality increased across the country.

  • In 37 states, incomes have grown faster among the top fifth of families than the bottom fifth of families since the late 1980s. No state has seen a significant decline in inequality during this period. Nationally, the richest fifth of families have enjoyed larger average income gains each year ($2,060, after adjusting for inflation) than the poorest fifth of families have experienced during the entire two decades ($1,814).
  • Middle-income families have also lost ground compared to those at the top. In 36 states, the income gap between the average middle-income family and the average family in the richest fifth has widened significantly since the late 1980s.

Top 5 Percent of Families Pulling Away Even Faster

The widening income gap is even more pronounced when one compares families in the top 5 percent of the income distribution (rather than the top fifth) to the bottom 20 percent. The higher one goes up the income scale, the greater is the degree of income concentration.

  • In the 11 large states analyzed, the average income of the top 5 percent of families rose by more than $90,000 on average. (In three states — New Jersey, New York, and Massachusetts — the increase exceeded $100,000.) By contrast, the largest increase in average income for the bottom fifth of families in these states was only $3,000. In New York, for example, average incomes grew by $108,000 among the top 5 percent of families but by less than $1,000 among the bottom 20 percent of families.
  • In the 11 large states for which this comparison is possible, the incomes of the top 5 percent of families have increased by 34 percent to 91 percent since the late 1980s. By contrast, the percentage increase in incomes of the bottom fifth of families in these states ranged from no change to 20 percent over the same period.[1]

Wide and Growing Gap Separates High-Income Families from Poor and Middle Class

The resulting disparities between the incomes of high- and low-income families are substantial.

  • In the United States as a whole, the poorest fifth of families have an average income of $18,120, while the top fifth of families have an average income of $132,130 — more than seven times as much. In 22 states, this top-to-bottom income ratio exceeds 7.0. (In the late 1980s, in contrast, just one state — Louisiana — had a top-to-bottom ratio exceeding 7.0.) The states with the biggest increases in income disparities since the late 1980s are Connecticut, Rhode Island, Massachusetts, Alabama, New York, Kentucky, Maryland, Kansas, New Jersey and Washington.
  • The average incomes of the top 5 percent of families are 12 times the average incomes of the bottom fifth. The states with the largest such gap are New York, Massachusetts, Connecticut, Mississippi, New Jersey, Tennessee, New Mexico, Alabama, California, and Virginia.

Similarly, income gaps between high-income and middle-income families have grown.

  • In over two-thirds of states, incomes have grown faster over the past two decades among the richest families than among families in the middle of the income spectrum — more than twice as fast, on average. In the remaining states, incomes have grown at about the same rate for the middle and top fifths of families.
  • The states with the largest gaps between high-income and middle-income families are Oklahoma, Mississippi, California, New York, Texas, New Mexico, Florida, Arizona, Louisiana, and Virginia.

Causes of Rising Inequality

Several factors have contributed to the large and growing income gaps in most states.

  • Growth in wage inequality. This has been the biggest factor. Wages at the bottom and middle of the wage scale have been stagnant or have grown only modestly for much of the last two decades. The wages of the very highest-paid employees, however, have grown significantly.

    Wage inequality is growing for several reasons, including long periods of high unemployment, globalization, the shrinkage of manufacturing jobs and the expansion of low-wage service jobs, and immigration, as well as the lower real value of the minimum wage and fewer and weaker unions. As a result, wages have eroded for workers with less than a college education, who make up approximately the lowest-earning 70 percent of the workforce. More recently, wages have been relatively stagnant even for college-educated workers (up only 2.5 percent between 2000 and 2007), in part due to the bursting of the tech bubble, but also due to the downward pressure on wages from offshore competition.

    Only in the later part of the 1990s did this picture improve modestly, as persistent low unemployment, an increase in the minimum wage, and rapid productivity growth fueled real wage gains at the bottom and middle of the income scale. Yet those few years of more broadly shared growth were insufficient to counteract the two-decade-long pattern of growing inequality. Today, inequality between low- and high-income families — and between middle- and high-income families — is greater than it was in the late 1980s or the late 1990s.

  • Expansion of investment income. Forms of income such as dividends, rent, interest, and capital gains, which primarily accrue to those at the top of the income structure, increased substantially during the 1990s. (Our analysis captures only a part of this growth, as we are not able to include capital gains income due to data limitations.) The large increase in corporate profits during the recent economic recovery has also contributed to growing inequality by boosting investors’ incomes.
  • Government policies. Government actions — and, in some cases, inaction — have contributed to the increase in wage and income inequality in most states. Examples include deregulation and trade liberalization, the weakening of the social safety net, the lack of effective labor laws regulating the right to collective bargaining, and the declining real value of the minimum wage. In addition, changes in federal, state, and local tax structures and benefit programs have, in many cases, accelerated the trend toward growing inequality emerging from the labor market.

States Can Mitigate the Growth in Inequality

Growing income inequality not only raises basic issues of fairness, but also adversely affects the nation’s economy and political system. The country has now entered a new economic downturn — quite possibly a recession — and already there are unmistakable signs that low- and middle-income workers will be hard hit. The uneven distribution of the country’s prosperity over the last two decades has left families at the bottom and middle of the income scale ill-prepared to weather this latest downturn. While the recent decline in the stock market is affecting the incomes of the wealthiest families, they have more savings to cushion the impact, and, if the 2001 experience is repeated, their incomes will again bounce back strongly.

A significant amount of increasing income inequality results from economic forces that are largely outside state policymakers’ control. State policies, however, can mitigate the effects of these outside forces. State options include:

  • Raise, and index, the minimum wage. Until Congress acted in 2007, the federal minimum wage had not been adjusted for inflation for almost ten years, and its real value had fallen considerably. Even with the 2007 increase, however, the minimum wage is not indexed to inflation — that is, it will not automatically keep up with the rising cost of living — so its value will begin to erode again after 2009 unless Congress acts. In addition, its value still falls well short of the amount necessary to meet a family’s needs, especially in states with a high cost of living. States can help raise wages for workers at the bottom of the pay scale by enacting a higher state minimum wage and indexing it for inflation.
  • Improve the unemployment insurance system. In 2007, the share of unemployed workers receiving benefits was only 37 percent — a sign that the current unemployment insurance system does not reflect the realities of work and family today. The current economic downturn makes it all the more urgent that federal and state policymakers act to make more jobless workers eligible for unemployment assistance by modernizing the system.
  • Make state tax systems more progressive. The federal income tax system is progressive — that is, it narrows income inequalities — but has become less so over the past two decades as a result of changes such as the 2001 and 2003 tax cuts. Nearly all state tax systems, in contrast, are regressive. This is because states rely more on sales taxes and user fees, which hit low-income families especially hard, than on progressive income taxes. (The income inequality data in this report reflect the effects of federal taxes but not state taxes.)

    Many states made their tax systems more regressive during the 1990s. Early in the decade, when a recession created budget problems, states were more likely to raise sales and excise taxes than income taxes. Later in the decade, when many states cut taxes in response to the strong economy, nearly all chose to make the majority of the cuts in their income taxes rather than sales and excise taxes.

    States now appear to be on the brink of another fiscal crisis, and a new round of tax increases is both likely and appropriate if the economy remains weak and the fiscal crisis deepens. Economists recognize that tax increases and other revenue measures, especially if targeted to high-income taxpayers, can be a reasonable alternative to spending cuts, and can actually be less harmful for a state’s economy than big spending cuts.

    There are many ways a state can increase taxes in a way that makes its tax system more progressive at the same time. For example, it can reduce its reliance on sales taxes by increasing its income tax on a temporary or permanent basis. If states instead turn to increases in sales taxes or fees to balance their budgets, they can offset the impact on those least able to pay by enacting or expanding tax credits targeted to low-income taxpayers. For example, more states could follow the lead of the 23 states that have adopted state earned income tax credits.

    States can also improve the progressivity of their tax systems by not enacting at the state level the corporate tax cuts included in the federal economic stimulus package and by restoring state estate taxes eliminated as a result of the phase-out of the federal estate tax.

  • Strengthen the social safety net. Federal and state changes to programs that assist low-income families have contributed to the increase in income inequality in recent years. While welfare reform efforts in the mid- and late 1990s succeeded in helping more families move to work, they often made it harder for very poor families unable to find jobs or work consistently to get income assistance — and intensive job preparation and training — they need both to make ends meet in the short run and to become employable over the longer period of time.

    States can take steps — such as improving assessment procedures and establishing job preparation programs for those with barriers to employment — that will make their assistance programs more responsive to those at the very bottom of the income scale while maintaining the work-focused nature of the program.

    States can also strengthen their social safety nets by providing low-wage workers with supportive services such as health coverage, child care, and transportation. In addition, they can provide intensive case management and other services to help current and former welfare recipients maintain their current jobs, move into better jobs, or obtain the education and training needed for career advancement.

While these are all useful steps, state policies are only one of a range of factors that have contributed to increasing income disparities over the past decade. If low- and middle-income families are to stop receiving steadily smaller shares of the income pie, federal as well as state policies will have to play an important role.

TABLE A:
TOP TEN STATES FOR SELECTED INCOME INEQUALITY MEASURES

Greatest Income Inequality Between the Top and the Bottom, Mid 2000s Greatest Income Inequality Between the Top and the Middle, Mid 2000s
New York
Alabama
Mississippi
Massachusetts
Tennessee
New Mexico
Connecticut
California
Texas
Kentucky
Oklahoma
Mississippi
California
New York
Texas
New Mexico
Florida
Arizona
Louisiana
Virginia
Greatest Increases in Income Inequality Between the Top and the Bottom, Late 1980s to Mid 2000s Greatest Increases in Income Inequality Between the Top and the Middle, Late 1980s to Mid 2000s
Connecticut
Rhode Island
Massachusetts
Alabama
New York
Kentucky
Maryland
Kansas
New Jersey
Washington
Connecticut
Oregon
Oklahoma
Maryland
California
New York
New Jersey
Rhode Island
Washington
Mississippi
Greatest Increases in Income Inequality Between the Top and the Bottom, Late 1990s to Mid 2000s States Where Income Inequality Increased Between the Top and the Middle, Late 1990s to Mid 2000s
Mississippi
Alabama
New Mexico
Connecticut
Indiana
Illinois
South Dakota
West Virginia
South Carolina
Massachusetts
Mississippi
New Mexico
Missouri
Illinois
Alabama
Florida
California
Texas

End Notes:

[1] An analysis of the average income of the top 5 percent of families was conducted for 11 large states that have sufficient observations in the Current Population Survey to allow the calculation of reliable estimates of the average income of the top 5 percent of families. These states are California, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, and Texas.

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