LAS VEGAS — The amount of money Nevada gets from taxes is growing at a much slower pace than it did decades ago, a statistic that a new report attributes in part to the widening gap between the incomes of the top 1 percent of earners and everyone else.
A report released Monday by Standard & Poor’s finds that stagnant wages among the masses have dampened consumer spending, which in turn affects state revenue — most noticeably for states like Nevada that depend largely on sales taxes.
“Rising income inequality contributes to slower tax revenue growth by weakening the rate of overall economic expansion,” the report says.
S&P notes that while Nevada saw average annual tax revenue growth of nearly 14 percent from 1950 to 1979, it dropped to 5 percent per year from 2000 to 2009. Since then, the pace has picked up to about 6 percent a year.
Sluggish collections at the state level could hit close to home, according to Constant Tra, associate director of the Center for Business and Economic Research at the University of Nevada, Las Vegas.
“The state is responsible for local schools,” Tra said. “States have more of a direct impact on people’s lives than the federal government.”
Sales tax revenue made up about 27 percent of Nevada’s $3.2 billion in revenue last fiscal year, according to the state. Gambling taxes brought in about 21 percent of the total, while the rest came from payroll, mining and other taxes. Nevada does not have an income tax.
States that are more dependent on income tax are less exposed to the eroding tax revenue, the report found, because they tend to capture more money from the increasingly wealthy top tier of earners. But revenue for those states can swing more drastically because the wealth of the highest earners is more concentrated in the volatile stock market.
Roughly 70 percent of economic activity comes from consumer spending. But consumers have become increasingly reluctant to spend, as median incomes have barely increased over three decades and remain lower than they were in 2007 when the Great Recession began. Median household incomes, adjusted for inflation, climbed 5.1 percent from 1979 to 2012, according to Census data.
“You’re talking about the largest portion of the economic agents that are seeing themselves being squeezed more and more,” Tra said. “These people aren’t going to be as comfortable spending.”
By contrast, the top 1 percent of earners have prospered for more than 30 years. Adjusted for inflation, their average incomes have nearly tripled to $1.26 million since 1979, according to the IRS.
S&P notes that the affluent tend to save a greater share of their income and spend it on untaxed services, meaning states are unlikely to see much of an increase in sales tax collections based on the gains among this group.
While the report noted states with more “progressive” tax structures deal better with the wealth gap, it called income inequality a fundamentally economic problem that can’t be fixed by tax policy changes alone. It suggested the best strategy for states could be to pursue policies supporting broad economic growth, regardless of tax policy.
Meanwhile, lawmakers including U.S. Rep. Steven Horsford, D-Las Vegas, have pointed to a higher minimum wage and earned income tax credit for low-income families as possible solutions.
“Public policy can help to reduce inequality and address poverty without slowing U.S. economic growth,” Horsford said in a speech last week in Washington. “It will take enlightened public policy to lead us toward an economic and social future that is more equitable, more diverse, and more inclusive of all families.”
