HONOLULU — A new report on the nation’s growing income gap finds that stagnant wages for most Americans have dampened consumer spending, and that’s bad for states like Hawaii that depend heavily on sales taxes to keep their governments running.
HONOLULU — A new report on the nation’s growing income gap finds that stagnant wages for most Americans have dampened consumer spending, and that’s bad for states like Hawaii that depend heavily on sales taxes to keep their governments running.
Roughly 70 percent of economic activity comes from consumer spending. But Americans have become increasingly reluctant to open their wallets as median incomes have barely increased over three decades and remain lower than they were in 2007 when the Great Recession began.
By contrast, the top 1 percent of earners have prospered. Adjusted for inflation, their average income has nearly tripled to $1.26 million since 1979, according to the IRS.
In Hawaii, the top 5 percent of workers earned an average of $300,194 in 2012, while the bottom 20 percent earned an average of $14,549 and the next 20 percent earned $40,741, according to Census data.
According to the report released today by Standard &Poor’s, states that are more dependent on income tax are less exposed to the eroding tax revenue because they tend to capture more money from the increasingly wealthy.
The affluent tend to save a greater share of their income and spend it on services that are often untaxed, meaning states are unlikely to see much of an increase in sales tax collections based on the gains among this group, S&P said.
Half of Hawaii’s state revenue is derived from the GET tax, which is similar to sales tax but includes goods and services.
“Because that is a broad-based tax, I think it’s less subject to the income inequality issue, because everyone pays the GET based on their consumption levels,” said Kalbert Young, state finance director.
A quarter of the state’s revenues come from income taxes, he said.
“If you have tax policies that have higher tax rates for the higher income earners, verses lower income earners, that would be one way to mitigate that phenomenon,” Young said.
Hawaii’s annual growth in state tax revenue was declining well before the recession. State revenue grew at an average annual rate of 11 percent from 1950 to 1979, slowed in the 80s to just under 10 percent, and dropped to 3.6 percent in the 90s.
The growth rate increased to 4 percent per year from 2000 to 2009 and has risen to nearly 7 percent annually since then.
Decreasing revenue during the recession led Democratic Gov. Neil Abercrombie to propose a tax on pensions, a move that cost him politically.
But Hawaii did raise its cap on the transient accommodation tax, which is charged by hotels in the tourism-dependent state. The tax was capped at 7.25 percent, but it was raised temporarily to 9.25 percent, and that change later became permanent. The state also capped the share that went to counties, taking the remainder. Those changes boosted state revenue by about $85 million a year starting in 2012, Young said.
“There were some other similar revenue enhancement measures they passed, and my recollection from the analysis is that none of them had materialized to the level that was thought,” Young said.
Nationwide, the share of income going to the top 1 percent doubled to 20 percent from about 10 percent between 1980 and 2011. At the same time, the rate of state tax revenue growth declined to less than 5 percent from about 10 percent.