What Did 2025 State Tax Changes Mean for Racial and Economic Equity?

This article was first published in Tax Notes.

As we look at the past year in tax policy, what impact did state tax changes have on racial and economic equity? The results are a mixed bag, with some states enacting promising policies that will improve tax equity and others going in the opposite direction.

Before we dive into what states did in 2025, it’s worth looking at the general relationship between race and economic equity and state tax policy.

Thanks to the Institute on Taxation and Economic Policy’s “Who Pays?” report, we know that nearly every state has a regressive tax code.¹ In other words, in most states, lower- and middle-income households pay a higher share of their income to state and local taxes than their higher-income neighbors. This is because of many factors but particularly because of a high reliance on sales and excise taxes and a low use of graduated rate personal income taxes.

We also know that the wealthy are disproportionately white and that low-income families are disproportionately people of color.² Taken together, this means that when state tax systems tilt in a regressive direction, they run a higher risk of worsening racial inequities.

To combat this regressivity, in 2025 some states raised new revenues with targeted tax increases on wealthier families and, on the other end of the income scale, expanded tax credits that support low- and moderate-income families. However, other states made their tax systems more regressive by adopting income tax cuts that will disproportionately benefit the most financially well-off while making it harder to fund public services that working people rely on.

Racial and economic wealth gaps don’t hurt just low-income households and families of color — they hurt everyone. Having tax revenue to invest in public programs is one of the key drivers of economic growth. Increasing tax equity helps compensate for a labor market that often disadvantages Black workers and fund education, economic security programs, and good healthcare — all qualities of a strong economy.³

Lawmakers should implement proven policies that shrink income and wealth gaps,⁴ make property taxes fairer,⁵ prevent the erosion of the corporate tax base,⁶ and reduce dependence on sales taxes.⁷

Revenue Raisers Supported Racial Equity

The goal of racial equity in the tax system is to ensure that tax policies do not systemically advantage white, wealthy households and disadvantage communities of color, intentionally or not. By dismantling these structures and designing fair, progressive revenue systems, tax policy can help shrink racial and economic gaps and support investments in communities historically harmed by discriminatory policies. For years, discrimination in the job market and segregation in society meant that people of color were forced into low-paying jobs.⁸ The ripple effects from that still haunt the economy today and make it harder for working-class families of color to get ahead.⁹

Regressive state tax codes can worsen this situation because higher-income households pay a lower share of their income in taxes than low-income families, who are disproportionately people of color.¹⁰ On average, the lowest-income 20 percent of households face a state and local tax rate nearly 60 percent higher than the wealthiest 1 percent of households. To fix this, states must implement policies that improve racial and economic equity by making their tax code less regressive and raising revenue to fund critical programs and services.

This year, Maryland showed what tax legislation that boosts racial equity looks like. Maryland found ways to improve its tax system that will improve racial and economic equity across the state.¹¹ This helps families with low wealth, a disproportionate share of which are Black.¹²

ITEP research shows Black families in Maryland have a median household income of about $79,000, compared with $110,000 for white families.¹³ With this tax package, Maryland became a state where high-income households no longer pay a smaller share of their income in taxes than lower-income households.¹⁴ The wealthiest 1 percent of households will pay 82 percent of the income tax changes. Overall, higher-income households will face a tax increase averaging $3,900. Of high-income households, 69 percent are white-led and only 17 percent are Black-led. This shows how much the income gap in the state affects the tax code.¹⁵

On the West Coast, Washington implemented tax changes that chip away at the long-standing problems of lower taxes on capital gains and inherited fortunes. Research from the Federal Reserve found that white heirs inherit three times as much as Black heirs, exacerbating the racial wealth gap.¹⁶ State lawmakers added an additional 2.9 percent tax to capital gains above $1 million. Policymakers also raised the exclusion and increased rates for the estate tax, focusing the tax even more on the wealthiest heirs. This is important for racial equity because people of color have lower capital gains and smaller amounts of inheritances, if they have any.¹⁷ These policies in Washington will help even out this one area of racial and economic wealth inequity, and other states should follow suit.

Four states — Maine, Montana, New Jersey, and Rhode Island — took steps to increase revenue from owners of expensive homes through transfer taxes and tiered property taxes.¹⁸ This includes charging an additional tax on second homes, creating additional transfer taxes, and creating two tiers for residential property within the state’s tax system. Taxes on high-end homes increase contributions from those at the top of the economic ladder, who are disproportionately white because of discrimination in housing and lending markets and century-old disparities in economic opportunity.¹⁹ Generating more revenue from the top of the income ladder helps states move closer to more equitable tax systems. This is especially true in states like Rhode Island that also direct the revenue raised to affordable housing creation and preservation.²⁰

Connecticut and Illinois both scored victories in their state corporate income tax codes, with new policies making profitable companies pay a surcharge on high profits and closing loopholes that had let corporations hide profits from state tax collectors.²¹ By passing worldwide combined reporting or coupling to federal net controlled foreign corporation tested income provisions, states can better capture all the profits earned in their state. Corporations are owned disproportionately by white shareholders who pay lower taxes than wage earners.²² This mismatch in policy between income from work and income from wealth has created a yawning racial wealth gap that has made it harder for people of color to thrive in the economy. Some corporations avoid state tax by underreporting their income to state tax collectors; one way to fix this is through smart legislation that enacts worldwide combined reporting, which makes the tax code more economically and racially equitable.²³ The revenue raised from these changes can further dismantle racial and economic inequities through public investments in areas like education, healthcare, and nutrition assistance that help all families, including in communities of color.

In Washington, D.C., lawmakers decoupled from the qualified small business stock deduction.²⁴ This provision, which was expanded under the new federal tax law,²⁵ allows venture capitalists to receive a 100 percent tax exemption when they cash out their beginning investments in companies that have rapidly increased in value. The exclusion disproportionately benefits white households compared with their Black and Latino counterparts. Because the recipients of the program include startup founders and investors, there is an underrepresentation of Black and Latino people: According to one report,²⁶ 77 percent of venture capitalist startup founders are white while 2.8 percent are Black or Latino. The District of Columbia was correct in its approach to decouple from this inequitable policy²⁷ — doing so will improve racial and economic equity and revenue raising.

Expanding State Refundable Credits Improved Equity

In 2025 10 states and the District of Columbia improved or created child tax credits or earned income tax credits. Those credits — especially when they are refundable — reduce economic inequality, advance racial equity, and help communities of color. When a tax credit like this is refundable, it means working-class families and individuals who pay plenty of taxes in general — but who have no income tax liability — can receive a tax refund. This income boost can help pay for expenses like housing, groceries, or debt. Refundable credits can serve as a lifeline to families that face food and housing insecurity. Refundable tax credits like the child tax credit and EITC dramatically reduce poverty for children and families. In 2024 they lifted 6.8 million people above the poverty line.²⁸ Nearly 1 in 5 Black and Native American people (including those of Hispanic origin) lived below the poverty line in 2024.²⁹

EITCs reduce income inequality and are targeted primarily to low-income working households with children. Five states — Maine, Maryland, New York, Utah, and Vermont — expanded their child tax credits in 2025, while Washington, D.C., and Georgia created their first. Although Georgia’s credit is a step forward, it is nonrefundable and therefore remains unavailable to children who are most in need.

Meanwhile, Connecticut, Montana, Pennsylvania, Vermont, Virginia, and Washington, D.C., created, expanded, or increased their EITCs in 2025. Pennsylvania created its first EITC at 10 percent of the federal credit.³⁰

Tax Cuts Widen Racial and Economic Inequities

For years, many states have cut taxes for the wealthy, who are disproportionately white. Those cuts create a regressive tax system that is less fair and makes it harder to fund important programs for lower-income and working families. These kinds of tax cut decisions worsen economic and racial inequities, and the trend continued in several states in 2025.

Lawmakers in Oklahoma and Mississippi passed legislation to eventually eliminate the states’ personal income taxes through triggered tax-cutting approaches over a number of years, paving the way for fiscal instability and lower-quality public services.³¹

Oklahoma lawmakers passed legislation that will reduce the number of the state’s personal income tax brackets from six to three, cut the top rate from 4.75 to 4.5 percent, and gradually phase the rate to zero over time, using revenue triggers.³² Once fully implemented, the state is expected to lose $4.5 billion in revenue each year that could have been used for public priorities. More than one-third of the tax cut dollars will benefit the wealthiest 5 percent in the state, who, because of long-term discrimination, are disproportionately white.³³ Legislators should have instead invested in education to help the state move up from being last in education rankings.³⁴

In Mississippi, policymakers will lower the state’s flat income tax rate from 4 percent to 3 percent by 2030, then continue reducing it through triggered reductions until the rate reaches zero.³⁵ ITEP research shows that of the $2.5 billion in tax cuts, about $1.8 billion (72 percent) is going to white households and only around $650 million (26 percent) is going to Black households, even though Black families account for about 40 percent of all tax returns.³⁶ The billions of dollars in lost revenue will also harm low- and moderate-income residents of all races.

Ohio and Kansas moved from a graduated to a flat personal income tax system that will be detrimental to their tax codes in the near future and the long run — hurting racial equity in the process.³⁷ One key pitfall of flat taxes is that they guarantee a regressive tax system that requires more payments from low- and middle-income families. Ohio³⁸ and Kansas³⁹ already have regressive tax codes, so transitioning to a flat tax will only make their systems more inequitable, meaning communities of color will likely pay more and the state will have less revenue to invest in public services.

Perhaps most egregiously, Missouri lawmakers eliminated taxes on capital gains income, becoming the only state with an income tax that no longer taxes capital gains.⁴⁰ As a result, wealthy, disproportionately white, people collect tax-free passive income while the state continues to tax middle- and low-income workers and people whose savings are in retirement accounts. Taxing income from wealth less than income from work contributes heavily to the equity problems in state tax codes.⁴¹ A Treasury report revealed that at the federal level, 92 percent of the preferential tax rate on capital gains goes to white households, whereas only 3 percent and 2 percent go to Hispanic and Black households, respectively.⁴² The numbers in Missouri are likely similarly lopsided.

Tax cuts by these and other states will make it harder for all families, including families of color, to thrive in this economy, in which it is already hard to get a mortgage or find a job. Although not the only culprit, a regressive tax code exacerbates the economic injustices faced by people of color. More must be done to end unfair tax benefits for profitable corporations and the wealthy — it’s the key to making state tax codes more just.

What’s Next: Tax the Wealthy to Reduce Inequities and Raise Revenue in States

All this is happening against the backdrop of fewer federal dollars coming into state coffers, thanks to the One Big Beautiful Bill Act (P.L. 119-21), which cut federal spending on healthcare and nutrition assistance while slashing taxes, mostly for the wealthy and corporations. States will be asked to step up and cover these costs — even as they face their own precarious fiscal predicaments.⁴³ Because of federal actions on taxes, tariffs, and spending cuts, states have less to work with to fund programs that improve equity, like education, healthcare, and economic security.

As states prepare to launch new legislative sessions in January, work remains to improve state tax codes. Here are two places to start:

• Implement a Wealth Proceeds Tax.⁴⁴ This tax is based on the federal net investment income tax, which applies to the proceeds or profits created by the wealth holdings of high-income households. It could raise substantial revenue in a targeted way. For example, universal adoption of a modest 4 percent tax would raise $45 billion for states in 2026. This is a great source of revenue for states and has the potential to reduce racial and economic wealth gaps by taxing wealth holdings.
• Disconnect From New Federal Tax Changes.⁴⁵ The new federal tax law brought changes to the tax code that will harm state revenues if states go along with them. State lawmakers should opt not to link with the law’s corporate tax breaks,⁴⁶ exemptions for tips and overtime pay,⁴⁷ subsidy for wealthy venture capitalists,⁴⁸ expansion of 529 plans,⁴⁹ increase in the state and local tax cap,⁵⁰ and continuation of the opportunity zone program,⁵¹ to name a few. Delinking will preserve critical revenue and keep the tax system from becoming less equitable, helping to prevent worsening racial and economic inequality.

Last year’s legislative session had many bright spots, but the draconian tax cuts (at both the federal and state levels) made it a dark one. Combined with federal funding cuts and an uncertain economy, states will have to decide what is best for their budgets in 2026. While they undergo those exercises, they must also commit to racial equity in the tax code because it is an investment in public services that helps people of all races thrive and makes tax codes stronger and fairer.