NCPA - National Center for Policy Analysis

States Rely Too Much on High Earners

March 30, 2011

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, reports the Wall Street Journal.

  • In New York before the recession, the top 1 percent of earners, who made more than $580,000 a year, paid 41 percent of the state's income taxes in 2007, up from 25 percent in 1994.
  • The top 1 percent of taxpayers paid 40 percent or more of state income taxes in New Jersey and Connecticut.
  • In Illinois, which has a flat income-tax rate of 5 percent, the top 15 percent paid more than half the state's income taxes.

As they've grown, the incomes of the wealthy have become more unstable.

  • Between 2007 and 2008, the incomes of the top-earning 1 percent fell 16 percent, compared to a decline of 4 percent for U.S. earners as a whole.
  • Because today's highest salaries are usually linked to financial markets -- through stock-based pay or investments -- they are more prone to sudden shocks.

The income swings have created more extreme booms and busts for state governments.  Rainy-day funds, which can help bail out governments during recessions, have also run into political opposition or proven too small to save state budgets.  Economists and state budget chiefs say the best hedge is better planning.

Source: Robert Frank, "The Price of Taxing the Rich," Wall Street Journal, March 26, 2011.

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