New York, NY—As state and local governments face unprecedented revenue shortfalls due to the economic effects of the COVID-19 pandemic, many are considering slashing services and public sector employment. These moves have the potential to devastate communities and local economies, causing unnecessary hardship, deepening the recession, and hampering the eventual economic recovery at both the state and federal levels. While state revenue shortfalls are staggering, and it would be best for the federal government to provide funds, states can step into action.
A new Roosevelt Institute report by Kitty Richards (consultant and strategic advisor for the Groundwork Collaborative), Bolstering State Economies by Raising Progressive Taxes, argues that staving off cuts and expanding services by raising taxes, especially on the wealthy, will both support workers and families and improve state economies. As Richards explains, the enormous economic benefits of increased government spending on services and jobs far outweigh any negative effects of raising taxes. States and localities have ample room to increase taxes on high-income households and profitable businesses: The majority of current state tax systems are inadequate and regressive, with the bottom 20 percent of the income distribution paying, on average, a state and local tax rate more than 50 percent higher than that paid by the top 1 percent. Changes to these tax policies are also an opportunity for states to fix policies that only exacerbate the racial wealth gap.
Currently, state and local government budgets are composed of some of the most visible and important government services provided to Americans and other residents. The two largest expenditures in most state budgets are health care and education; these are exactly the public goods now on the chopping block.
“Across the country, governors and legislatures have begun enacting austerity budgets that will hamper their ability to fight the pandemic and restart economic activity, deepen inequality, and lead to poverty, hunger, and deprivation for millions,” said Richards. “A just—or even adequate—response to the pandemic must ask wealthy, predominantly white households, and those who have not been directly affected by the current crisis, to contribute more and invest in services and aid for those who need them most.”
Current options for increasing revenues in a progressive way include:
- Enhancing income taxes;
- Recapturing federal giveaways to the rich;
- Raising corporate tax revenues;
- Reforming wealth taxation; and
- Modernizing consumption taxes.
Tax changes like these can help states close their budget shortfalls while protecting vulnerable communities and bolstering state economies. While it would be best for the federal government to step in with funding, states can, in fact, raise revenue to protect state residents and services.
About the Roosevelt Institute
The Roosevelt Institute is a New York-based think tank that, in partnership with its campus network and the FDR Presidential Library and Museum, is working to redefine the American economy. Focusing on corporate and public power, labor and wages, and the economics of race and gender inequality, the Roosevelt Institute unifies experts, invests in young leaders, and advances progressive policies that bring the legacy of Franklin and Eleanor into the 21st century.
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