In the first post of this series, I presented evidence of a link between a state's dominant political party and it's fiscal health*. Bottom-line: Red states are in better shape than blue states. The following chart doesn't leave much room for argument on this point:
Chart from: Commentary: Best-Run States Are Heavily Republican, Study Finds by John Merline http://www.investors.com/politics/commentary/best-run-states-are-heavily-republican-study-finds/ Accessed on 2/4/2017
One of the things I wondered about this finding was the connection between progressivity of state taxes and their fiscal solvency. I had read once that California, New York, New Jersey, Connecticut and Illinois were most dependent on taxes of the wealthy - and all of them are among the 10 least solvent states. The Tax Foundation also analyzed state tax codes and found that five states have income tax codes more progressive than US federal codes: California, New Jersey, Vermont, Hawaii, and DC - four of which are on the Bottom 10 list.
It makes sense that states with the most progressive tax systems often get into fiscal trouble. High earners have especially volatile incomes. For instance, during the Great Recession, their earnings fell by more than twice as much as the rest of the US population's. States that rely too much on taxing the rich lack a stable revenue stream. During economic downturns, their tax revenues dry up. When the rich fall, they take state finances down with them.