The impact of state fiscal structure and income inequality on inter-generational economic mobility

Recent national trends reveal a troubling socioeconomic picture: upward mobility has stagnated, income inequality has widened, and home ownership rates among younger and low-income Americans have declined. While federal tax policy garners attention, state and local fiscal systems more directly shape families’ disposable income and access to public goods. This study examines how state tax structures and inequality affect inter-generational mobility and home ownership across the United States from 2012 to 2022. We use two fiscal indicators: <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" display="inline"><mml:mi>τ</mml:mi></mml:math>-ITEP, the difference in effective tax rates between the bottom 20% and top 1% of earners, and the pre-tax Gini coefficient. Outcomes include upward mobility, measured by the mean adult income rank of children born to parents at the 25th percentile, a commonly used benchmark for assessing opportunity from disadvantaged households, and home ownership rates. Findings show that tax regressivity (higher <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" display="inline"><mml:mi>τ</mml:mi></mml:math>-ITEP) and inequality (Gini) are significantly and negatively associated with inter-generational mobility, even after controls for GDP per capita and educational attainment. Results suggest that structural inequities in subnational tax systems and income distribution independently constrain upward mobility. In contrast, home ownership is more strongly influenced by inequality, education, and GDP, with no significant link to tax structure. Time-based models show mobility peaked during the post-recession recovery (2012–2014) and fell sharply during the COVID-19 pandemic (2020–2022), highlighting the limits of short-term relief without structural equity. These results demonstrate the importance of equitable state fiscal policy and reduced inequality in expanding opportunity.