December 16, 2018

by Steve Stofka

Up or down?

According to a recently updated analysis of 2015 income data by the Economic Policy Institute (EPI), Jackson, Wyoming leads the list of census statistical areas for income disparity (Note #1). Jackson is a ski resort and a natural wonderland where rich families live in expensive homes. It is a micropolitan, not a metropolitan statistical area (MSA) like Columbus, Denver or New York City. Most of the top statistical areas for income disparity in this study are resort areas. Workers in resort towns are typically low income, skewing measures of income disparity higher.

The Brookings Institute (BI) filtered out these resort data outliers in their analysis (Note #2). Large coastal cities topped the list of MSAs. The EPI study used the ratio of the top 1% of incomes to the bottom 99% to calculate disparity. They found that it was increasing, a common trope of the political left. BI calculated their disparity by using a ratio of the top 5% of incomes to the bottom 20% of incomes. BI found that disparity remained the same overall. They did note that more cities saw a declining disparity. Methodology matters.

Wealthy people are attracted to states with no income tax, and most of the top statistical areas listed by EPI are in such states. Wyoming is one of nine states that do not tax most or all personal income (Note #3). Taxpayers who claim some of their income as earned in that state can save a good deal of money on taxes. Taxpayers can meet the rules of residency used by the Census Bureau and IRS by living the most days in a certain state (Note #4). Individual states may require that a person have that state’s drivers license, voting record or other proof of residency (Note #5).

States with no income tax have high sales and gasoline taxes to help fund local infrastructure and services. Those on the political left claim that these regressive taxes hurt working families. Conservatives reject the progressive definition of “fair” taxation. On principle, tax rates for common goods and services should be equal. In addition, homeowners with expensive homes contribute more to the commonweal in higher property taxes and their employment of service labor for upkeep maintenance, repair and remodel.

The BI study highlights a problem that will continue to divide the country. The states with the highest income inequality are in states that vote Democratic. Representatives in those states are responding to a real problem, but Democrats want higher federal tax rates for taxpayers in all states to fix a problem in a few densely populated coastal states. A consistent feature of Democratic platforms are national solutions to local problems. Republicans counter that states should solve their own problems. However, Democratic politicians have already jacked up tax rates in states with high income disparity.  They are concerned that wealthy taxpayers will flee high tax states and make the problem worse. They are right. Wealthy taxpayers are leaving high tax states like New Jersey.

If you think you have a solution to this political problem, please mail your solution to “Santa Claus, c/o North Pole” and have a wonderful Christmas.

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Notes:
1. EPI analysis of 2015 income data, updated in July 2018 https://www.epi.org/publication/the-new-gilded-age-income-inequality-in-the-u-s-by-state-metropolitan-area-and-county/
2. Brookings Institute analysis of income data https://www.brookings.edu/research/city-and-metropolitan-income-inequality-data-reveal-ups-and-downs-through-2016/
3. Alaska, Florida, Nevada, S. Dakota, Texas, Washington and Wyoming do not tax personal income. New Hampshire and Tennessee tax investment income only. Those states have higher sales and gasoline taxes. Bankrate (https://www.bankrate.com/finance/taxes/state-with-no-income-tax-better-or-worse-1.aspx)
4. Census Bureau residence rules – count people where they live for most of the year. If they have no permanent residence(s), use their residence on April 1st of the census year. Snowbirds and others who split their residence should use the place where they spend the most days. https://www.census.gov/population/www/cen2010/resid_rules/resid_rules.html
5. Colorado residency rules for tax purposes https://www.colorado.gov/pacific/sites/default/files/Income6.pdf. Also, Intuit’s guidelines on multi-state tax filing https://turbotax.intuit.com/tax-tips/state-taxes/multiple-states-figuring-whats-owed-when-you-live-and-work-in-more-than-one-state/L79OKm3jI