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The Opportunity States Have to Attack Income Inequality

As they rebuild their education, health-care and tax systems after the devastation of COVID-19, they can take important steps that can significantly narrow income and wealth disparities.

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State capitol building in Providence, Rhode Island. (Photo: David Kidd)
The surge in spending on Medicaid and other COVID-19-related health-care services, coupled with the collapse in revenues, is already devastating state governments' finances. It's likely to be years before revenues return to pre-pandemic levels. But the recovery will also provide an opportunity for states to rethink the way they tax their citizens and deliver services to them, and to replace existing policies with those that focus on reducing income inequality. States have far more policy levers than any other level of government, and it is time for them to provide the leadership on this issue.

It seems clear now that the greatest long-term threat to our nation and to our democracy is the growing disparities in income and wealth. According to recent statistics, the top 1 percent receives 22 percent of the nation's income and holds 40 percent of its wealth. The COVID-19 downturn is worsening these disparities: More than 20 million individuals are now unemployed, at the same time that the stock market's performance has preserved or increased billionaires' wealth.

In the rebuilding of state governments, it is critical to make changes in spending priorities, tax systems, the organization of government and the way services are delivered. While just about every policy area has an impact on inequality, the three most important are education, health care and taxes.

Education: Make funding equitable and provide universal pre-kindergarten. Virtually all studies indicate that universal pre-K has a high rate of return on investment, including reducing later school dropouts and even incarceration. Yet nationally, only 50 percent of low-income 4-year-olds are eligible for a program. States should start by covering all 4-year-olds with family incomes below 200 percent of poverty and then moving to universal pre-K over time.

Funding for elementary and secondary education is shared roughly equally by state and local governments: 47 percent from states and 44.8 percent from localities. But the funding is upside-down, as high-income school districts average 22 percent above low-income districts on a spending-per-student basis. States need to redo their formulas to equalize the per-student spending across all of their school districts.

You find a similar problem in higher education, as states generally provide their flagship universities, with mostly higher-income students, more than double the per-enrollee contribution that they provide to community colleges, with mostly lower-income students. States need to flip this so that community colleges receive the higher contribution. This should allow lower-income students to have free community college in many states.

Health care: Expand Medicaid and state health-care exchange coverage. In 2018, 27.5 million Americans, or 8.5 percent, did not have health insurance. By some estimates, the COVID-19 pandemic has likely doubled that number, to 55 million individuals. The first step is for the 14 states that have not yet expanded Medicaid to do it. Second, it is critical that all states aggressively find those individuals who are eligible for Medicaid and assist them in enrolling. All states should ensure that they have presumptive eligibility, so that providers can sign up individuals with incomes below 140 percent of the poverty level when they seek medical services. For individuals between 140 and 400 percent of poverty, states should assist them in signing up through the Affordable Care Act exchanges so they can receive the federal subsidies.

Tax systems: Modernize them and make them more progressive. State tax systems were built for a manufacturing economy of the 1950s, not for our 21st-century high-technology service economy. Not only are tax systems out of sync with individual state economies, since few tax services, but they are highly discriminatory against low-income individuals. Sales taxes, which represent 15 percent of general revenues, are highly regressive, with the lowest 20 percent in income paying 7.1 percent of their income in sales taxes while the top 1 percent pay 0.9 percent.

Individual income taxes, which represent 18 percent of general fund revenues, are not much better. Seven states have no income tax, and two states tax only interest and dividends. All other states have either flat or slightly progressive taxes.

States need to include services in the sales tax to make it less regressive. And they need to make their individual income taxes much more progressive to offset the regressive sales taxes. This can be done by adding tax brackets with higher tax rates for higher-income individuals.

More than any other level of government, states have an opportunity to reverse longstanding practices and policies that exacerbate inequity in America. Governors and state legislators need to start developing their visions now so they are ready to operationalize them when the COVID-19 threat begins to retreat.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.

Former executive director of the National Governors Association
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