Over the past century, Delaware has gone from the state with the greatest inequality in the distribution of household income to one of the states with the least inequality.
The standard measure of household income inequality used by economists is the Gini coefficient, created by Corrado Gini in 1912. A Gini score of zero represents complete equality, as in every household has the same income. A Gini score of 1 shows complete inequality, as in one household has all the income.
Economist Mark W. Frank has estimated the Gini coefficient for every state from 1917 through 2015. What does the data say about Delaware?
In 1917, Delaware had the most unequal distribution of income in the United States, with a Gini score of 0.73. The national rate at the time was 0.51. The top 1 percent of Delaware household incomes accounted for 39 percent of all adjusted gross income in the state. Across the nation, the top 1 percent of households accounted for just 18 percent of all adjusted gross income.
As of 2015, the tables reversed. Delaware had the seventh most equal distribution of household income in the country. The Delaware Gini coefficient was 0.58, below the U.S. average of 0.64. The top 1 percent of Delaware households accounted for 15 percent of all adjusted gross income, compared to 22 percent across the nation. Florida and New York led all the states with the top 1 percent of households accounting for 61 percent of all adjusted gross income.
How did it happen?
There are three major explanations for the shift in income distribution.
The first is the larger U.S. economy. When the economy is overheated and assets, such as stocks, are soaring in value, the top of the household income distribution increases. In the late 1920s, for example, Delaware’s Gini coefficient bounced up to 0.71. The labor-oriented World War II economy knocked it down to 0.51. By the 1970s and 1980s, Delaware had shifted rapidly into the service economy, with its bifurcated distribution of wages, and the state’s income inequality fell below the U.S.
The second is the rapid growth in poorer minority and immigrant households. New Castle County went from a composition of 13 percent minorities before the public school busing decision to over 25 percent today.
Finally, there is the steady squeeze of state and local taxes on higher income households. Following the introduction of a state income tax with a top rate of 19.8 percent, Delaware’s Gini coefficient steadily dropped to below the nation as high-income households relocated. Adding to the incentives to leave, Delaware has one of the highest corporate income tax rates in the nation and is one of only five states to have a gross receipts tax.
Implications for business
If the state of Delaware wanted a relatively equal distribution of income, mission accomplished.
The result is less demand in Delaware for luxury goods and high-end services, slower growth in demand deposits at financial institutions, and relatively stagnant growth in state personal income taxes.
The song and dance used by the state to maintain personal income tax revenue is to apply the top rate of 6.6 percent at incomes of $60,000, which means the top rate applies to more than half of the households in Delaware … resulting in one of the most progressive income tax rates in the U.S. This further promotes the migration of higher income households out of Delaware.
Dr. John E. Stapleford is president of ECON First, which provides web-based marketing strategies based upon economic analysis and web presence research Contact: (302) 650-4965 or email@example.com