Daniel Gross compares the rate of growth of state tax revenue to that of Federal tax revenue noting that the difference may have something to do with rising income inequality:
At Wal-Mart, whose sales depend on the fortunes of the broad consuming public, sales growth has been sluggish. At Saks, which caters to shoppers with more disposable income, sales growth has been impressive. It’s as if these two national retailers are operating in two different economies. A similar dynamic can be seen in recent state and federal tax revenues. After several years of impressive growth, state tax revenues seem to have hit a wall in the second half of 2006 … Adjusted for inflation, however, revenues barely budged. Those second-half growth rates, the weakest since 2003, represented sharp declines from the near-double-digit rates in the first half … While the blistering growth rate of Federal tax revenues has slowed, revenues are still rising at an unexpectedly high rate, narrowing the deficit and providing vindication for backers of President Bush’s 2001 and 2003 tax cuts. In the fourth quarter of 2006, according to the Treasury Department, federal receipts rose 8.17 percent from the quarter a year earlier … What accounts for the difference? Broadly speaking, the trends of state and federal tax revenues are tethered to the economy at large. But the structure of the two tax systems can produce divergent results, especially when economic gains are not distributed evenly. At the state level, personal income taxes produce about 39 percent of revenues. But over all, state income taxes aren’t very progressive … In terms of recent revenue growth, at least, the federal government is more like Saks. Its taxes derive largely from payroll and income taxes, with a significant contribution from corporate income taxes. The federal income tax is progressive, with brackets from 10 percent to 35 percent. So an economy in which corporations and high-income workers are thriving, and in which median incomes are barely budging, would still produce a large increase in tax revenue.
In other words, the rising tide that lifts only yachts.