DENVER – Colorado is among the top 10 states most reliant on income taxes for revenue, according to a new report concluding that income inequality is contributing to slower economic growth nationally.
The report released today by the credit ratings agency Standard & Poor’s finds that from 1980 to 2011 the average annual state revenue growth fell to 5 percent, from 10 percent. At the same time, the top 1 percent of earners doubled their share of total income.
For states like Colorado, income inequality has meant revenue performance is closely tied to financial markets, according to the report. Indeed, Colorado’s quarterly revenue forecasts during the last three years have cited taxes on capital gains as one reason for higher-than-expected tax collections.
In late 2011, the windfall even meant that lawmakers didn’t have to cut as much money to schools and colleges as they initially thought.
But the state’s budget director, Henry Sobanet, has told lawmakers that the revenue stream from capital gains is not a source they can count on.
That’s a point the S&P report makes, too.
“As income inequality has risen over time, the overall mix of personal income has shifted in favor of capital gains and away from labor sources,” the report said. “Those at the top obtain more of their income from capital gains, which on the whole, fluctuate much more than income from wages.”
Most economic activity comes from consumer spending, a key driver of growth. 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, were $54,045 in July, about 4.6 percent lower than they were in late 2007, according to estimates by Sentier Research.
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 IRS data.
“I think that there’s another issue about being income-tax dependent and that’s that the income tax has become more volatile over time,” Sobanet said. “And there’s been a lot of research that has demonstrated that the swings up and down are more pronounced than they used to be.”
He notes that during the previous two recessions, Colorado’s general fund – which is made up of tax revenue – has dropped about 15 percent each time. As a result, the state has made it a point to grow the budget reserves for the next downturn.
Colorado’s tax structure also differs from most states before of the Taxpayer’s Bill of Rights, or TABOR, a 1992 voter-approved constitutional amendment that restricts taxing and spending by lawmakers.
