Kim Rueben writes;  Standard and Poor’s got a lot of attention last week for a study that concluded that rising income inequality is damaging state tax revenues. State tax revenue growth has slowed in recent decades and income inequality has grown, but the story is far more complicated than S&P suggests.

Factors effecting state tax revenues irrespective of the change in income distriution:

1.  More of what we are buying is tax free.

2.  Taxes have been reduced on the rich.

Some states are beginning to counter those trends. We’ve seen a recent return to higher top rates in California, New York and other states. At the same time, however, some states such as Kansas are cutting their statutory rates. Many of those changes are so new they are not reflected in the S&P data.

Three decades ago both the federal and most state codes were indexed and inflation rates fell. As a result, the phenomenon known as bracket creep became a less valuable source of tax revenue.    S&P’s Conclusions on State Tax Revenue and Inequality