- Market Commentary
- By Jack Ablin
- October 1, 2019
Impact of Recent Policies on US Personal Income
The Bureau of Economic Analysis (BEA) recently released US personal income data, which breaks down income by state and by industry. It also revised its income data for the previous three years. This level of detail offers insights into the impact of public policy on Americans’ pocketbooks, which in turn could have an impact on future elections.
By comparing income growth over the last year to its most recent 5-year annualized rate we can glean the impact of recent policy measures– such as corporate tax reform, including a limit on the deductibility of state and local taxes and property taxes– on federal income earned. We can also get a better gauge of the impact of tariffs that have been imposed over the last four quarters.
US personal income grew 4.9 per cent over the last 12 months, which was incrementally higher than its five-year annualized rate of 4.6 per cent, suggesting income acceleration. The job market remains strong, with an unemployment rate so low you would have to go back to the 1960s to find a lower reading. Moreover, there are a greater number of job openings than there are unemployed Americans, highlighting how tight the labor market is.
But breaking down personal income growth by Red and Blue states yields dramatic differences between them. Blue states, defined as those voting for Hillary Clinton in the 2016 election, saw their one-year income growth– while still high at 4.8 per cent– slip slightly from the 4.9 per cent five-year annualized rate. Meanwhile, Trump-supporting Red states saw their income growth climb dramatically from the 5-year annualized rate of 4.2 per cent to 5.1 per cent over the last 12 months. Florida and Texas were the biggest Red state contributors, with their incomes climbing 5.6 per cent and 6 per cent, respectively, over the last 12 months.
States exhibiting the largest growth acceleration– the largest pickup in personal income growth between their 1-year and 5-year rates– were solidly Red Oil & Gas territories, like Oklahoma, North Dakota and Alaska. Oil & Gas states were able to take advantage of OPEC production cuts by boosting output even though oil prices were flat. The laggards, notably New York and California, were high-tax Blue states stung by the SALT provision in the corporate income tax legislation. Recent tax legislation limited state and local tax deductibility to $10,000, a small sum in high-tax states such as these.
Tit-for-tat trade tariffs are the ugly byproduct of an ongoing dispute with China, and US farm products have been targeted by China’s retaliatory trade policy. US personal income attributed to farming fell $5.9 billion in Q2/19, according to the BEA report. The Midwest was hit hard, with Illinois farmers losing $1.4 billion over the most recent three-month period. Looking through a political lens, three of the five hardest-hit farming states voted for President Trump in 2016, although none of them (Iowa, Indiana and North Dakota) would be considered swing states.
Illinois is among the five states, and the only Blue state, with the lowest personal income growth over the last year, according to BEA data. Residents have been fleeing. Eighty per cent of Illinois cities witnessed a reduction in population, according to an Illinois Policy Institute study cited in The Wall Street Journal. Illinois joins Nebraska, South Dakota, Kentucky and Mississippi, all solidly Red states, with the lowest income growth among the 50 states over the last 12 months. Among the five highest income growth states, the common theme is that they’re all west of the Mississippi River.
While recent political and economic policies have clearly shifted the balance with respect to personal income growth, the political implications of these developments for the upcoming election are muted, given their relatively small impact on swing states. Will Iowa suddenly vote for a Democrat in the face of lower farm income? Unlikely, in our view.