When Democrats regained control of the U.S. House of Representatives, Alexandria Ocasio-Cortez, D-N.Y., almost immediately took aim at America’s growing income inequality by recommending a 70 percent tax rate on income over US$10 million.
Income inequality refers to the unequal distribution of income between the rich and poor.
Inequality in the U.S. has dramatically increased since the 1970s, under both liberal and conservative administrations in Washington. And the kind of policy Ocasio-Cortez is proposing will be impossible to pass with the polarized politics in Washington D.C.
The federal government could reduce inequality by raising the federal minimum wage, raising taxes on the wealthy, regulating the financial sector and strengthening labor unions.
Instead, the federal government has more often done the opposite in recent decades, and these actions have contributed to growing inequality. In my recent book with William Franko, “The New Economic Populism: How States Respond to Inequality,” we examine what the states are doing to combat inequality in the absence of federal action to address it.
Combating inequality in the most unequal states
Massachusetts, sometimes called “Taxachusetts” because of its liberal policies, is among the most unequal states in the country. Between 1980 and 2015, the share of income in the state going to the top 1 percent of earners increased from 10 percent to over 25 percent.
Politicians in Massachusetts have been pushed by activists and unions to combat this growing inequality.
For example, when state Senate President Stan Rosenberg, a Democrat, took office in 2015, he named the fight against economic inequality as his major priority. He led attempts to change the Massachusetts Constitution to increase taxes on millionaires to pay for early childhood education. Legal challenges prevented this amendment from going before voters for their approval.
Rosenberg also worked with the governor, Republican Charlie Baker, and other leaders to pass expanded tax credits for the working poor.
It is not surprising that a liberal Democrat would tackle inequality, but Baker has also pushed for major expansions of the Earned Income Tax Credit, which provides cash back to the working poor when they file taxes.
The tax credit is expected to put an additional $214.1 million into the pockets of low-income working families in Massachusetts in 2019.
Gov. Baker also signed bipartisan legislation increasing the minimum wage and requiring employers to offer paid family and medical leave. The hike in the minimum wage from $11 to $14 per hour in 2023 will increase the annual income of a minimum wage worker working 40 hours every week from under $23,000 to over $29,000. That’s an average increase of almost 30 percent.
These policies will make a big difference in increasing the incomes of those at the bottom of the pay scale.
Limiting conservative policy shifts at the ballot box
As in Massachusetts, inequality has also grown in Missouri, though not as rapidly. The 1 percent income share increased from just under 10 percent to nearly 18 percent from 1980 to 2015.
Missouri has seen many attempts by conservative groups to remake state politics and policy in recent decades. As a result, Missouri economic policy has veered sharply to the right in the last decade, but especially since Missouri government came under unified Republican control in 2014.
The legislature has enacted right-to-work legislation, limiting the power of unions, and enacted major tax cuts that disproportionately benefit the wealthy.
Despite this shift to the right, voters have consistently supported what is normally considered a liberal policy, minimum wage increases, at the ballot box.
In 2018, Missouri voters approved a proposition to increase the minimum wage by 40 percent, from $7.85 to $12 by 2023.
That same year, unions sponsored a ballot initiative to overturn the states’ recently enacted “right-to-work” law, which would have made it harder for unions to enroll members. Voters approved the measure by a 2-1 margin, giving the U.S. union movement one of its greatest political victories in years.
Minimum wage increases and expanding tax credits for the working poor will put more money into the pockets of the poor and therefore limit the growth of income inequality. Research examining all 50 states is clear: Higher minimum wages and stronger unions lead to lower income inequality.
When states increase their minimum wage or take steps to support the power of unions, they are fighting against inequality.
Limits of state action
States can do a lot more than increase minimum wages or expand tax credits. They can also invest in education and attempt to foster the growth of high-wage industries. While some states are acting, a substantial reversal of inequality by the states is unlikely.
There’s only so much states can do to reverse inequality. They have a smaller tax base. And, unlike the federal government, states are limited in their ability to raise taxes and spend due to restrictions in many state constitutions, and balanced budget requirements. They are also, of course, unable to shape trade and monetary policy.
Furthermore, many states have been adopting policies that will lead to more inequality. In the end, any substantial change in inequality would require federal action.
But what is taking place in the states can actually spur change at the federal government level.
We have seen in past periods of economic discontent, like the Great Depression, that state policy created a blueprint for subsequent federal policy action, like minimum wage laws and unemployment insurance benefits.
State action can also show federal politicians that addressing inequality with certain policies can be popular. Gov. Baker has been among the most popular governors in the nation since he was elected.