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families grew in three-fourths of the states; it did not decline in any state. Between the early 1990sand the early 2000s, this gap increased in 21 states.Here and elsewhere in the paper, changes in income inequality are determined by calculating theincome gap — the ratio between the average family income in the top fifth and the average familyincome in the bottom fifth (or the middle fifth) — and examining changes in this ratio over time.These changes are then tested to see if they are statistically significant. States fall into one of threecategories: (1) states where inequality increased – that is, the ratio increased by a statisticallysignificant amount, (2) states where there was no change in inequality – the change in the ratio wasnot statistically significant and (3) states where inequality decreased by a statistically significantamount.While the national trend toward increasing inequality has received widespread coverage, lessattention has been focused on how this trend has varied by state. This analysis examines trends inincome inequality in each of the 50 states over the past two business cycles.Income Inequality Increased in Most States Over the Last Two DecadesAcross the nation, the income gap between the richest and poorest fifths of families issignificantly wider than it was two decades ago: In 38 states, the incomes of high-income families grew faster than the incomes of low-incomefamilies between the early 1980s and the early 2000s. Of the remaining states the incomes ofthe bottom fifth and the top fifth of families increased about the same amount in 11 states. Inone state — Alaska — the income of low-income families grew at a faster rate then the incomeof high-income families. On average, nationally, the incomes of the poorest fifth of families grew by 2,660 over thetwo-decade period, after adjusting for inflation. By contrast, the incomes of the richest fifth offamilies grew by almost that much ( 2,148) each year over the course of the two decades, for atotal increase of 45,100.The widening income gap is even more pronounced when one compares families in the top fivepercent of the income distribution (rather than the top fifth) to the bottom 20 percent. In the 11 large states for which this comparison is possible, the incomes of the top five percentof families increased by 73 percent to 132 percent between the early 1980s and the early 2000s.By contrast, the incomes of the bottom fifth of families in these states increased by 11 percentto 24 percent over the same period.1 In the 11 large states analyzed, the increases in the average incomes of the top five percent offamilies ranged from 80,400 to more than 153,000. In five states — Massachusetts,1 An analysis of the average income of the top five percent of families was conducted for eleven large states that havesufficient observations in the Current Population Survey to allow the calculation of reliable estimates of the averageincome of the top five percent of families. These states are California, Florida, Illinois, Massachusetts, Michigan, NewJersey, New York, North Carolina, Ohio, Pennsylvania, and Texas.2

Michigan, New Jersey, New York, and Pennsylvania — the increase exceeded 100,000. Bycontrast, the largest increase in average income for the bottom fifth of families in these stateswas only 4,000. In New York, for example, the average income of the top five percent offamilies grew by 105,000, while the average income of the bottom 20 percent increased by only 1,900.Middle-income families also lost ground compared to those at the top. In 39 states, the gapbetween the average income of middle-income families and the average income of the richest fifthof families widened significantly.Wide Gap Separates High-Income Families from Poor and Middle ClassThe resulting disparities between the incomes of high- and low-income families are substantial. In the United States as a whole, the poorest fifth of families had an average income of 16,780in the early 2000s, while the top fifth of families had an average income of 122,150, or morethan seven times as much. In the early 1980s, there was no state in which the average income of high-income families wasas much as 6.4 times larger than the average income of low income families. By the early 2000s,32 states had “top to bottom” ratios of 6.4 or greater. The increase in income disparities wasgreatest in Arizona (with the largest disparity), New York, Massachusetts, Tennessee, NewJersey, West Virginia, Connecticut, Hawaii, Kentucky, and South Carolina. By the early 2000s, the average incomes of the top five percent of families were 12 times theaverage incomes of the bottom 20 percent. The states with the largest such gap were Arizona,Texas, New York, New Jersey, Kentucky, Tennessee, Florida, California, North Carolina, andPennsylvania.Similarly, the income gaps between high-income and middle-income families have grown: In the early 1980s, there was only one state — Alaska — in which the average income of thetop fifth of families was more than 2.3 times larger than the average income of the middle fifthof families. By the early 2000s, the “top-to-middle” ratio was greater than 2.3 in 36 states. The states with the largest gaps between high-income and middle-income families were Texas,Kentucky, Florida, Arizona, Tennessee, New York, Pennsylvania, North Carolina, New Mexico,and California.Prosperity of 1990s Was Not Shared EquallyInequality did not grow as quickly during the 1990s as during the prior decade (or as quickly as itappears to be growing in the 2000s), but income gaps continued to grow in many states.3

In close to half of all states, the income gap between the top and bottom of the incomedistribution grew between the early 1990s and the early 2000s. In 21 states, average incomesgrew more quickly among the top fifth of families than among the bottom fifth. By contrast, the average incomes of the bottom fifth of families grew significantly faster thanthe incomes of the top fifth in only one state - Georgia.The incomes of very high-income families — the richest five percent — grew dramaticallybetween the early 1990s and the early 2000s. In eight of the 11 large states analyzed, the incomes ofthe top five percent grew substantially faster than the incomes of the poorest 20 percent.Families in the middle of the income distribution have fallen farther behind upper-income familiesin many states over the past decade: In some 21 states, the ratio of the incomes of the top fifth of families to the middle fifth offamilies increased between the early 1990s and the early 2000s. Income disparities between thetop and middle fifths of families increased most in Kentucky, Pennsylvania, North Carolina,Indiana, Tennessee, Texas, West Virginia, Vermont, New Jersey, and Connecticut. The top-tomiddle ratio did not decline significantly in any state.Causes of Rising InequalityResearchers have identified several factors that have contributed to the large and growing incomegaps in most states. The growth of income inequality is primarily due to the growth in wageinequality. Wages at the bottom and middle of the wage scale have been stagnant or have grownonly modestly for much of the last two decades. The wages of the very highest-paid employees,however, have grown significantly.Several factors have contributed to increasing wage inequality, including long periods of highunemployment, globalization, the shrinkage of manufacturing jobs and the expansion of low-wageservice jobs and immigration, as well as the lower real value of the minimum wage and fewer andweaker unions. These factors have led to an erosion of wages for workers with less than a collegeeducation, who make up approximately the lowest-earning 70 percent of the workforce. Morerecently, even those with a college education have experienced real wage declines, in part due to thebursting of the tech bubble in high-wage industries, but also due to the downward pressure on wagegrowth from offshore competition.Only in the later part of the 1990s was there a modest improvement in this picture. Persistent lowunemployment, an increase in the minimum wage, and rapid productivity growth fueled real wagegains at the bottom and middle of the income scale. Yet those few years of more broadly sharedgrowth were not sufficient to counteract the two-decade-long pattern of growing inequality. Today,inequality between low- and high-income families and between middle- and high-income families isgreater than it was either 20 years ago or ten years ago.4

The expansion of investment income (such as dividends, rent, interest, and capital gains) duringthe 1990s also contributed to increased income inequality, since investment income primarilyaccrues to those at the top of the income structure. The large increase in corporate profits duringthe recent economic recovery has also contributed to growing inequality by boosting the incomes ofinvestors.Government policies — both what governments have done and what they have not done — havecontributed to the increase in wage and income inequality over the past two decades in most states.For instance, deregulation and trade liberalization, the weakening of certain aspects of the socialsafety net, the lack of effective labor laws regulating the right to collective bargaining, and thedeclining real value of the minimum wage have all contributed to growing inequality. In addition,changes in federal, state and local tax structures and benefit programs have, in many cases,accelerated the trend toward growing inequality emerging from the labor market.States Can Choose a Different CourseA significant amount of increasing income inequality results from economic forces that are largelyoutside the control of state policymakers. State policies, however, can mitigate the effects of theseoutside forces. States play a major role in setting labor-market policies that affect income inequality,such as rules governing the formation of unions, the design of the unemployment insurance systems,and the establishment of state minimum wages.The minimum wage, for example, has a direct bearing on individual earnings. The federalminimum wage has not been adjusted for more than eight years, and its real value has fallenconsiderably since the late 1970s. States can help reverse or moderate the decline in wages forworkers at the bottom of the pay scale — and compensate for the decline in the value of the federalminimum wage — by enacting a higher state minimum wage, as 18 states and the District ofColumbia have done.Improvements are also warranted in the unemployment insurance system. During the 1980s,unemployment insurance protection for both middle- and low-income families eroded as a result offederal and state cutbacks. The share of jobless workers receiving these benefits is now lower thanat the end of the 1970s. Efforts are needed at the national and state levels to make moreunemployed workers eligible for unemployment assistance.In addition, there are a host of options that state policymakers can consider to strengthen theirsocial safety nets. Previous federal and state changes to programs that assist low-income familieshave contributed to the increase in income inequality in recent years. The number of familiesreceiving cash assistance has fallen significantly, for example, as states have placed increasingemphasis on reducing their cash assistance caseloads. The number families receiving cash assistance,which peaked at 5 million in the early 1980s, dropped by more than 57 percent by 2000. Whilestudies indicate that one-half to three-quarters of former welfare recipients are employed shortlyafter they leave the rolls, many families continue to face significant barriers to obtaining and keepingsteady, well-paid work. These barriers are likely to retard income gains for the lowest-income fifthof families.5

In addition, for those families who continue to receive cash assistance, the value of these benefitshas fallen in a number of states. In the typical state, cash assistance benefits for a family of threewith no other income fell by more than 18 percent between 1994 and 2003, after adjusting forinflation.States can strengthen their social safety nets by providing low-wage workers with supportiveservices such as transportation, child care, and health coverage. They can also provide intensive casemanagement and other services to help current and former welfare recipients maintain their presentemployment, move into better jobs, or obtain the education and training needed for careeradvancement.In addition, states can improve coordination among the low-income programs they administer.By adopting simpler, more streamlined rules and procedures regarding applications, eligibilitydetermination, and other matters, states can make these programs easier for eligible families toparticipate in and easier for states to administer.States also can modify tax policies that influence the distribution of post-tax income. (Theincome inequality data in this report reflect the effects of federal taxes but not state taxes.) Theoverall effect of the federal income tax system is to narrow income inequalities (that is, the federaltax system is progressive), though the system has become less so over the past two decades as aresult of changes such as those enacted in 2001. Nearly all state tax systems, in contrast, areregressive. Because states rely more on regressive sales taxes and user fees than on progressiveincome taxes, they take a larger percentage of income from low- and middle-income families thanfrom the wealthy.When many states cut taxes during the strong economy of the 1990s, nearly all chose to make themajority of the cuts in their income taxes. Yet states that raised taxes to address budget problemsresulting from the recession of the early 1990s were more likely to raise sales and excises taxes thanincome taxes. Both of these actions rendered state tax systems even more regressive.Now that economic growth has returned, state finances are improving. Despite the fact that moststates have a long way to go before revenues and services are restored to pre-recession levels, somestates are again beginning to consider tax reductions. There are many ways that states can improvethe progressivity of their tax systems in a time when they may be considering tax reductions. Forexample, states can increase their reliance on income taxes rather than sales taxes (which place adisproportionate burden on low-income families) by cutting sales tax rates rather than income taxrates. Another way to lessen the negative impact of state tax systems on the poor is to broaden thesales tax base to include more services consumed by high-income families.States also can enact tax credits targeted to low income taxpayers. For example, more states couldfollow the lead of the 17 states that have adopted state earned income tax credits. And states canimprove the progressivity of their tax systems by restoring state estate taxes that were eliminated as aresult of the phaseout of the federal estate tax.State policies constitute only one of a range of factors that have contributed to the increasingdisparities in incomes over the past decade. If low- and middle-income families are to stop receivingsteadily smaller shares of the income pie, federal as well as state policies will have to play animportant role.6

TABLE A: TOP TEN STATES FOR SELECTED INCOME INEQUALITY MEASURESGreatest Income Inequality Betweenthe Top and the Bottom, Early 2000s1. New York2. Texas3. Tennessee4. Arizona5. Florida6. California7. Louisiana8. Kentucky9. New Jersey10. North CarolinaGreatest Increases in Income InequalityBetween the Top and the Bottom,Early 1980s to Early 2000s1. Arizona2. New York3. Massachusetts4. Tennessee5. New Jersey6. West Virginia7. Connecticut8. Hawaii9. Kentucky10. South CarolinaGreatest Income Inequality Betweenthe Top and the Middle, Early 2000s1. Texas2. Kentucky3. Florida4. Arizona5. Tennessee6. New York7. Pennsylvania8. North Carolina9. New Mexico10. CaliforniaGreatest Increases in Income InequalityBetween the Top and the Middle,Early 1980s to Early 2000s1. Kentucky2. Pennsylvania3. West Virginia4. Indiana5. Hawaii6. Texas7. Tennessee8. North Carolina9. Arizona10. New YorkGreatest Increases in Income InequalityBetween the Top and the Bottom,Early 1990s to Early 2000s1. Tennessee2. Connecticut3. Washington4. North Carolina5. Utah6. Texas7. West Virginia8. Pennsylvania9. Florida10. MaineGreatest Increases in Income InequalityBetween the Top and the Middle,Early 1990s to Early 2000s1. Kentucky2. Pennsylvania3. North Carolina4. Indiana5. Tennessee6. Texas7. West Virginia8. Vermont9. New Jersey10. Connecticut7

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II.IntroductionThis report examines trends in the distribution of income from the early 1980s to the early 2000sin each of the 50 states. These time periods were chosen because they represent similar points in theeconomic cycle. The early 2000s — the most recent period for which state-by-state data areavailable — spans the lowest point of the most recent economic downturn. This period wascompared to a similar low point in the national economy in the early 1980s. The report finds thatthe incomes of the country’s richest families climbed substantially over the past two decades, whilemiddle- and lower-income families saw only modest increases in income.This trend of rising inequality has been well documented by data at the national level from theCongressional Budget Office and other sources. Few analyses, however, have focused on howincome inequality has changed within the different states and regions of the country. This analysisfinds that in the vast majority of states, the gap between the incomes of the highest-income familiesand the incomes of middle-class and poor families has grown by a large margin over the period.2During the 1990s, the exceptionally low unemployment rates of the late 1990s did yield gains forlow-wage workers and relatively broad-based wage growth, but income gaps continued to widen.This broad-based growth ended with the 2001 downturn. Real wages for low- and moderateincome families grew more slowly in 2002 and the first part of 2003 and then began to decline.To a greater extent than in past recessions, the highest-income families also saw declines in realincome during the 2001 downturn. These declines, which reflected the impact of the drop in thestock market, were short lived. Indications are that since 2002,

The Center on Budget and Policy Priorities, located in Washington, DC, is a non-profit research and policy institute that conducts research and analysis of government policies and the programs and public pol