The top 1% of earners fill the coffers of states like California and New York during a boom—and leave them starved for revenue in a bust.
Why are states like California in dire budget crises nowadays? Sure, state expenditures have risen quite a bit, but according to Brad Williams, a former economic forecaster for the state of California, the root cause of all these budget woes is the states’ reliance on taxing the rich.
Before you reach out for the metaphorical pitchfork, consider this:
Nearly half of California’s income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population’s during the recession. When they crashed, they took California’s finances down with them.
Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California’s over-dependence on the rich. “We created a revenue cliff,” he said. “We built a large part of our government on the state’s most unstable income group.”
New York, New Jersey, Connecticut and Illinois—states that are the most heavily reliant on the taxes of the wealthy—are now among those with the biggest budget holes. A large population of rich residents was a blessing during the boom, showering states with billions in tax revenue. But it became a curse as their incomes collapsed with financial markets.
Arriving at a time of greatly increased public spending, this reversal highlights the dependence of the states on the outsize incomes of the wealthy. The result for state finances and budgets has been extreme volatility.