Tax the rich, but not too much

Seems to be the message from a recent WSJ piece on tax policy in various states.  The top 1% of the income distribution pay 40% or more of the state income tax in states such as California, Connecticut, New Jersey and New York.  Although this seems like great news for the other 99%, there are two catches.

First, much of the income received by the top 1% is highly variable, consisting of bonuses, stock, and other forms of one-time payouts.  When the economy went south in 2008, the incomes of the rich declined much more than the average income (after all, they had further to fall) which put these states in a precarious position.

Second, the rich have discretion about where they live and pay taxes.  Some states (e.g., Florida and Texas) do not have an income tax; others charge much lower rates than California and New York. 

Bottom line: states need to design tax rates and policies so that they receive a smooth stream of income to finance government commitments.  If tax rates rise too much at higher levels of income, this becomes harder to do.