The extension of tax cuts for the wealthy has stalled efforts to use federal fiscal policy to reduce economic inequality, a chasm now so large that even Fed Chairman Ben Bernanke recently said it was creating "two societies." Progressives shouldn't give up on the push to rewrite a federal tax code that has become ever more tilted to the upper class. But there are other fronts in the battle against inequality besides Washington, D.C. -- like getting states to raise taxes on the rich and invest more in building the middle class. And because most rich people live in states that lean liberal, this strategy will be much harder for Republicans to block.
If President Obama had fulfilled his campaign promise of raising taxes on the rich, a huge part of this tab would have been paid by residents of the New York metro area followed by Los Angeles and Chicago -- with San Francisco and Boston not far behind. California and New York alone have more high-earners (those making over $200,000) than the 22 states that John McCain won in 2008 combined.
Seen through a geographic lens, the partisan stances on inequality are upside down. Top Democrats from coastal metro areas push for tax hikes that would disproportionately hit their constituents, while heartland Republicans speak for regions with few high-earners. (Outgoing House speaker Nancy Pelosi has roughly four times as many high-earners in her district as her successor, John Boehner.)
With so much wealth concentrated in "blue" states, a federalism strategy of attacking inequality makes sense. And it's feasible, too. Democratic governors now rule states that are home to the vast majority of high-earners, including California, Connecticut, Illinois, Massachusetts, Maryland, and Washington. These six states - with nearly a third of all Americans - also have some of the nation's largest concentrations of people who need help rising into the middle class, or staying there.
States can pull a number of levers to reduce inequality. First, they could raise taxes on the rich and directly compensate for Congress's failure to create a more progressive tax system. For example, Connecticut's new Democratic governor - the first in twenty years - could propose raising that state's comparatively low top income tax bracket of 6.5 percent to 11 percent. California's new Democratic governor could propose raising that state's top bracket from 10.5 percent to 15 percent and New York's top rate might go from 8.9 percent to 13.5 percent. Under these changes, high earners would pay the same overall tax rate they would have if the Bush tax cuts weren't extended.
Second, liberal states could use the new funds to underwrite a range of policies aimed at helping more people get into the middle class. These might include new funding for higher education systems which are reeling from budget cuts, new investments to create "green collar" jobs in areas like home weatherization, larger investments in pre-school education, and an expansion of state earned income tax credits that help low-skilled workers escape poverty. These investments would not just create more social mobility they would also stimulate economic growth in both the near and long term.
Would the wealthy move out of states that sharply raise taxes? That seems unlikely, since many of these states already have higher tax rates than anywhere else and are still huge magnets for the affluent. In any case, a significant slice of the upper class that live in blue states are okay about paying higher taxes in order to bankroll investments that will create more prosperity in the long run.
A beauty of federalism is that it allows Americans to pursue local solutions to critical problems in the absence of national consensus. Reformers have routinely detoured around roadblocks in Congress to make state-level progress. Republicans may be able to stymie wealth redistribution nationally, but the cards favor local action given where most rich people actually live.
All we need now is for Democratic governors to have the courage to play those cards.