We argue that economic inequality between ethnic groups increases state repression. We contend that a high level of ethnic inequality fuels distributional conflicts between poor and rich ethnic groups. It also increases the salience of ethnic identity and promotes ethnic mobilization to challenge the status quo. This between-group tension creates collective grievances for ethnic groups, mounts challenges to incumbent governments and increases perceived threats to governments. The greater the perceived threats, the more likely that governments will employ coercive measures. We further argue that the impact of ethnic inequality on state repression is moderated by the level of democracy. Various institutional mechanisms in democracies increase the costs of repression, reducing leaders’ incentives to employ coercive measures, even when facing high levels of ethnic inequality. Evidence from 152 countries between 1992 and 2011 supports our arguments.