When national and state data diverge

October 11, 2011

In our turbulent times, middle-income households are falling behind and national data depicts an economy that’s stagnating. But tax revenue data for many states hints that some earners have had substantial increases in their incomes.

Let’s start with the national numbers. There has been a lot of reporting this week about median personal income dropping since the official end of the recession in June 2009. Robert Pear wrote in the New York Times:

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

If we isolate the period between June 2009 and June 2011, household income fell 3.5 percent nationally, or approximately 1.75 percent per year, according to the Sentier Reseach study quoted by Pear. This income reduction syncs up pretty closely with consumer expenditure data from the Bureau of Labor Statistics that was reported in September. From the BLS:

Average annual expenditures per consumer unit fell 2.0 percent in 2010 following a decrease of 2.8 percent in 2009, the U.S. Bureau of Labor Statistics reported today. While spending fell in 2010, prices for goods and services increased 1.6 percent from 2009 to 2010, as measured by the CPI.

So household incomes are down, spending is down and inflation is up marginally — it is an economy in stall speed for most Americans. What I’ve been watching and wondering about, though, is why state tax collections are making such massive gains. By focusing on the aggregated national numbers, a lot of observers have failed to notice how robustly state tax revenues are recovering.

To see a glimpse of this you have to dive into data collected by the Rockefeller Institute for quarterly tax collections by state. Looking at sales tax collections (which falls more heavily on those with lower income) versus state income tax collections (which is progressive) suggests that income inequality may be growing.

You can see in the table below that there are large gains in state personal income tax revenues for June 2011 compared to June 2010. For some states the jump is easy to understand: Illinois raised its state personal income tax rate in 2011 from 3 percent of adjusted federal income to 5 percent of adjusted federal income, so it’s no surprise the state saw an increase in revenues. But Alabama left its personal income tax rates unchanged and saw revenues surge 18 percent. That move happened even as the state’s employment rate ticked up a measly 0.6 percentage points. Alabama’s sales taxes, which are regressive, also have increased 2.4 percent year over year. The Alabama Poverty Project lays out the state’s income disparaties:

Alabama has the second biggest gap between rich and poor in the nation, according to a study released in 2008 by the Center for Budget and Policy Priorities,  “Pulling Apart: A State-by-State Analysis of Income Trends.” What does that mean? The top 5 percent of wage earners in Alabama make 13.5 percent as much as the poorest 20 percent – combined.

So why are states taking in more tax revenue at a time when the median worker is under pressure? Income inequality seems to be a likely candidate. I’d guess that there has been a surge in income gains for higher earners who are subject to the more progressive rates of personal income tax. Income for those who earn less is flat or falling slightly, which syncs up with the Sentier study mentioned above.

If this is indeed a growing trend then states will obviously be rethinking their revenues. There is a lot to be seen in state level data and it might tell a different tale than national statistics.


Rockefeller Institute: Strong, Broad Growth in State Tax Revenues Continued in the Second Quarter of 2011

Tax rate data source: The Tax FoundationData spreedsheet

BLS: Consumer expenditures 2010

IRS: Individual Statistical Tables by Size of Adjusted Gross Income

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