Tax policies are commonly viewed as race-neutral or “colorblind”— simply because information on race or ethnicity is not reported on tax returns or explicitly referenced in policymaking. But race and ethnicity can be related with income and poverty because of historical and ongoing discrimination in education, jobs, homeownership, and access to business capital. As a result of that discrimination, White households have disproportionately higher incomes than Black, Hispanic or Latino (hereafter referred to as Latinx), and Native American households and even larger concentrations of wealth. And because taxes are linked—directly and indirectly—to income, the tax system is not as colorblind as it may appear to be.
In a new Urban-Brookings Tax Policy Center brief, we examine the impact of state and local revenue systems on racial disparities. We find that racial disparities are accentuated in some states with large Black populations by their governments’ reliance on regressive taxes. In other states, racial disparities are narrowed through progressive income taxes and property taxes.
This brief builds on an analysis we did last year, which explored the relationship between specific provisions of the federal income tax and racial inequities.
How do state and local tax systems affect racial disparities?
The federal tax system is progressive overall, but state and local taxes often have the opposite effect. In contrast to the federal government, states and localities draw a greater share of their revenues from regressive sales taxes, fees, and penalties, increasing the tax burden on low-income residents who are disproportionately likely to be Black and Latinx.
Criminal justice fines and forfeitures can have especially harmful impacts for Black and Latinx populations. Unjust enforcement and an inability to pay those charges can lead to a disproportionate share of penalties imposed on those groups. While these constitute a very small share of total revenues, some places with larger shares of Black and Latinx populations rely more on them.
Overall, how revenue is raised and what type of tax benefits are offered are related to location and race. For example, some Southern states with large population shares of Black residents, such as Alabama, Louisiana, and Mississippi, rely more on sales taxes and charges for revenues and less so on property and income taxes. And when they do tax income, the rate structure is often flat or nearly so and at lower rates; in combination, those policy choices shift proportionately more of the tax burden from higher-income residents to low-income residents.
When localities in those states try to initiate certain tax reforms, they may be “preempted” by state legislators. For example, Alabama's largely White state legislature blocked the city council in Montgomery—a city with a largely Black population—from instituting a one percent occupational tax to raise revenues to fund public services in 2020.
How a focus on racial equity can improve policymaking
Despite this, most state and local policymakers typically don’t discuss the racial equity impacts of tax changes, in part because of data limitations. The Biden administration's executive order on racial equity could result in new data that would enable government analysts to provide policymakers with timely analysis of the racial incidence of tax policies. But because of the linkage between race and economic wellbeing, there is already somewhat of a road map for policymakers to follow.
For example, states have raised top individual income tax rates and expanded the earned income tax credits to make their tax systems more progressive. More recently, states have started exploring other tax reforms explicitly targeted at wealth, such as reinstating their estate and inheritance taxes or imposing “mansion taxes”—higher tax rates on the purchase of properties valued above a certain amount. Raising revenues from the top of the income and wealth ladder helps narrow racial inequalities because White households have benefited more than other populations from policies that subsidize the accrual of wealth.
Many states and localities are also considering new “sin taxes” on soda, marijuana, or sports gambling. Because those are taxes are on consumption, they are inherently regressive. But their effects could be mitigated if the resulting revenues paid for programs benefiting lower-income populations. Evaluating fiscal proposals on the basis of racial equity impacts could help policymakers understand the full effects of these reforms.
Racism bears huge costs on our economies and continues to affect most government policies and administration today. Over the past year, the pandemic, recession, and racial justice protests have highlighted how events and the government’s responses often have disparate impacts for populations by race and ethnicity. Now is an especially opportune time for state and local policymakers to consider how their fiscal reforms can also impact people by race or ethnicity, as these governments contend with how to shore up lower-than-anticipated revenues and repair economic inequities laid bare by the pandemic.
