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Pulling Apart: Income Inequality Worsening in Louisiana; Shared Prosperity at Risk

Posted on November 14, 2012

Wealthiest households see gains, while incomes for most families remain stagnant, new report says

by David Gray and Steve Spires

A new report finds that Louisiana ranks among the worst states for income inequality, and that inequality has grown faster in Louisiana than in most other states since the late 1990s.

The average income of Louisiana households in the richest 20 percent was 8.8 times greater than incomes in the poorest 20 percent of households in the late 2000s, according to the new study by the Center on Budget and Policy Priorities (CBPP) and the Economic Policy Institute (EPI). That’s the sixth highest in the country, trailing only New Mexico, Arizona, California, Georgia and New York.

Nationally, households in the top 20 percent earned an average of 8 times as much as households in the bottom fifth.

Louisiana also had high income disparities between middle-income households and those in the top 20 percent, ranking 10th among the states.

The report found that incomes for Louisiana’s wealthiest households have grown considerably while those in the middle and below have seen few gains in recent years. While incomes in the richest 20 percent of households climbed 17 percent from the late 1990s to the mid 2000s, middle-income households saw gains of just 7.8 percent over that period, and incomes of the poorest fifth did not change.

These and other details are contained in a new report, Pulling Apart: A State-by-State Analysis of Income Trends, by the Center on Budget and Policy Priorities (CBPP) and the Economic Policy Institute (EPI). It was released in Louisiana in coordination with the Louisiana Budget Project.

Growing Inequality Reflects Troubling Trends in Economy and Tax Policy
This new data on income inequality tells a similar story as recent Census data that showed the gains in median household income in Louisiana made in the earlier part of last decade have essentially been erased, in large part because post-Katrina rebuilding and sky high natural gas prices gave way to a deep recession and tepid recovery.

Louisiana has the nation’s third-highest poverty rate, and poverty in Louisiana continues to rise at a time when it has leveled off elsewhere.

The latest inequality data reflects a trend that dates back several decades. Between the late 1970s and the mid-2000s, the top 20 percent of Louisiana households saw their incomes rise by 62 percent in inflation-adjusted dollars, while those in the bottom 20 percent gained of less than 10 percent.

Although inequality has grown faster in Louisiana than in the majority of states, income stagnation at the bottom is a national trend with multiple causes. Globalization and technological shifts, the decline of manufacturing jobs and growth in lower-wage service sector jobs, and changes in the federal tax code have all contributed. Despite productivity gains in the economy, many workers have not shared in the prosperity.

State Tax Structure is Hurting, Not Helping Louisiana’s Working Families
It is important to note that this new data reflects after tax income, meaning it only counts what families have left after paying federal taxes. The data also accounts for income and other benefits that families receive from the federal government, such as Social Security, food stamp and housing assistance.

But the report does not account for the effects of state and local taxes. That means the income gap in Louisiana may actually be worse than the report suggests. That’s because Louisiana has one of the most regressive tax systems in the country, with sky-high sales taxes that disproportionately hit the poor, low property taxes and lucrative income-tax exemptions that are claimed mostly by the wealthy.

In FY 2011, around 40 percent of all individual tax credits went to the richest 3,310 taxpayers who had adjusted incomes of more than $1 million, for an average credit amount of $51,000 dollars. Taxpayers with adjusted incomes under $30,000 (the majority of taxpayers) received only 22 percent of credits, for an average credit amount of around $100. At the same time, dollars for K-12 education remained frozen for the fourth year in a row while financing for higher education and health care were slashed.

On the other hand,Louisiana’s high sales taxes place a heavy burden on lower-income residents. The bottom 20 percent of Louisiana households pay as much as 10 percent of their income in state and local taxes—mainly due to state and local sales taxes, which combined are the third highest in the nation. Those at the top pay less than 6 percent of their income in sales taxes.

Reforming Tax Code, Investing in Families Can Promote Broader Prosperity
Louisiana lawmakers could take a number of steps to decrease income inequality and help improve social mobility for the state’s poorest residents. A good first step would be an increase the value of the state Earned Income Tax Credit. Louisiana’s credit is currently the smallest in the nation at 3.5 percent of the federal credit, while the average state credit is 16 percent of the federal one. Doubling the credit would put another $45 million back in the pockets of Louisiana’s low-income workers.

Additionally, policymakers could use tax reform as an opportunity to make Louisiana’s overall tax code less regressive and fairer by closing tax loopholes that primarily benefit the wealthy and reducing taxes that burden those with less.

Finally, tax reform must be done in a way that raises the revenue that Louisiana needs to invest in education, infrastructure and other proven building blocks of a strong economy. Rising inequality and a cuts-only approach to education and health care are not the ways to help Louisiana’s families prosper.

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