Study: Texas' Income Inequality Could Affect State Revenues

Sep 15, 2014

A new study from Standard & Poor’s suggests that income inequality is leading to lower state tax revenues in Texas. The study also finds inequality weakens overall economic growth, with a stronger effect in states like Texas that depend on sales tax revenues.

Still, the state has seen expanded growth in average tax revenue, the study said – 5.48 percent revenue growth from 2000 to 2009 compared to the 4.07 percent in sales tax-dependent states and 5.25 percent growth in income tax-dependent states.

The credit-rating agency says the growing gap slows potential growth and lowers the growth of the state's overall tax base, which is “stronger and only statistically significant” in sales tax-reliant states. The inequality could prove problematic in future budgeting, as S&P says Texas can’t correct the problem by simply raising taxes.

Texas currently has the sixth highest level of income inequality, according to the Center on Budget and Policy Priorities, and the state’s lowest earners have seen their incomes drop 10 percent in the last decade. 

Dr. Vance Ginn with the Texas Public Policy Foundation says income inequality isn’t great for the Texas economy at face value –inequality means sales tax revenues are less predictable, and that shortfall in revenue means less money for the state overall. But, Ginn says, income increases among top-earners creates more jobs.

“The idea behind income inequality is that it leads to slower economic growth because too much money ends up in the hands of too few, and those few that gain those dollars tend to save it,” he says.  “They are, in fact, going back into the economy, to allow for it to grow and to allow for more jobs to be created.  This idea that having income inequality is an impediment to economic growth is just wrong, if you look at the overall economics of where those dollars are flowing.”

Houston-Tillotson University’s Dean of the School of Business & Technology Adrian Price admits jobs are still being created in Texas even with this inequality, but the growth is disproportionate.

“The state of Texas, and Austin in particular, are starting to generate significantly higher paying jobs, especially in the tech area,” Price says. “However, you need individuals to serve those people – whether it’s fast food, retail or something else.  When you have a migration of higher income individuals in the tech sector and lower-income individuals serving those residents, the income inequality tends to become exacerbated and the rate tends to increase.”

According to a study from the Federal Reserve Bank of Dallas, 55 percent of jobs created in Texas since 2000 were higher-wage jobs.

The Standard & Poor’s study concluded that income inequality is currently reflected in its credit ratings. The credit-rating agency raised Texas’ credit rating to AAA last year, the agency’s highest ranking.