Just Taxes Blog by ITEP

Federal Tax Reform Would be a Step in the Right Direction for Millennials of Color

Federal Tax Reform Would be a Step in the Right Direction for Millennials of Color

October 18, 2021

Brakeyshia Samms
Brakeyshia Samms
State Policy Analyst

The well-documented economic plight facing millennials, a generation born between 1981 and 1996 that was ravaged by one of the worst recessions in history and an economic crisis induced by a global pandemic, is a stark reminder of the role that policy has in shaping economic outcomes.

Some economists criticized the policy response to the Great Recession as too tempered and compromised, resulting in a slow economic recovery and prolonged elevated unemployment that hurt millennials just entering the workforce. In response to the unprecedented pandemic that shut down the economy, policymakers passed multiple rounds of stimulus checks and expanded unemployment benefits, among other things, which prevented a dramatic spike in poverty. While the policy response to the pandemic mitigated hardship, we’re still putting back together the pieces. Ongoing economic challenges, compounded with racial injustices, make living in this economy that much more challenging for Black, Hispanic, Indigenous, and other millennials of color. Tax policy that favors wealth over work and contributes to widening economic inequality is one of the culprits, but the tax plan being debated in Congress also provides lawmakers with a path to right some of this wrong. As we enter the next stage of the tax policy negotiations, during which many wealthy Americans and highly profitable companies will seek to weaken the package, it is important that the perspective of millennials of color be considered.

Currently, millennials of color are worse off than their parents when it comes to wealth expectations. So, if one of the goals of federal policymakers is to reduce racial income and wealth disparities, the proposals outlined are a good start. Tax reforms included in the budget package making its way through Congress would help by boosting incomes and making raising children more affordable—two things that would help millennials of color thrive in today’s economy. It would also fund these investments with measures to narrow the wealth gap and curb our tax code’s larger bias for wealth over work.

Proposed Changes to the Tax Code Would Help Millennials of Color Meet Their Economic Needs

Like white millennials, millennials of color are having and raising children while the costs associated with those life-changing events are steadily rising. Millennial parents account for most new births in the United States today, and raising young children is especially expensive. The expanded Child Tax Credit (CTC) being considered as part of the reconciliation legislation is a heartening example of a policy proposal that has millennials, and their children, at top of mind. Specifically, the reform expands the credit for young children from $2,000 to $3,600 while older children (ages 6 and up) would qualify for a credit of up to $3,000. More importantly, the proposal would expand the credit’s reach—through a provision known as full refundability—to include low-income families left behind by the credit’s previous design. Nearly half of Black and Hispanic children live in families that will be deemed “too poor” to qualify for the full CTC next year if these reforms are not enacted.

Moreover, parents of young children would receive another welcome reprieve through reforms to the Child and Dependent Care Tax Credit (CDCTC). The CDCTC offsets some of the high cost of childcare, and reforms under consideration would increase the amount of expenses eligible for the credit, the percentage of those expenses credited back to families, and the credit’s reach across the income spectrum. Among working mothers with children under age 5, the cost of childcare for two children swallows, on average, more than half of the household income of the median Black or Indigenous family and more than 40 percent of the median Hispanic family’s income.

Many millennials without children would also see their incomes lifted by the tax reforms under consideration through enhancements to the Earned Income Tax Credit (EITC). Compared to their white counterparts, millennials of color confronting barriers in employment, education, and other areas tend to be in lower-wage jobs, making it more difficult for them to make ends meet. The EITC is a powerful tool that helps boost incomes for workers in lower-paid jobs, and cementing enhancements of the EITC to include more childless workers and increase the size of their benefit would be critical for helping to lift millennials of color out of poverty. Without these improvements to the EITC, too many millennials—including a disproportionate share of people of color—will be left behind.

Tax Reform Would Reduce Income and Wealth Gaps Among Millennials and Across Generations, While Raising Revenue To Support Other Reforms

The reconciliation bill would pay for the tax changes described above largely with higher taxes on the wealthy that would help narrow our tax code’s preference for wealth over work. There is a growing racial wealth divide between millennials of color and white millennials that tax policy can help to remedy.

Addressing the preferential treatment for income derived from stocks and other investments versus income earned from work is important. Millennials of color typically have less wealth than their white counterparts and are therefore less likely to benefit from special, lower rates applied to capital gains income generated by the sale of assets. The bill’s provision to raise the top capital gains tax rate would reduce the racial wealth gap and generate revenue to help fund other urgent priorities affecting millennials of color.

Other promising provisions in the bill would help close the racial wealth gap by reducing the amount of assets excluded from the federal estate tax and by cracking down on estate tax loopholes like grantor retained annuity trusts, or GRATs, that provided an estimated $100 billion windfall to the wealthy over a period of just 13 years. These reforms make it more likely that the small number of mostly white millennials lucky enough to receive a large inheritance will see that windfall subject to the estate tax. This would decrease the racial wealth gap among millennials and help finance investments in more broadly shared prosperity.

A proposed 3 percent surcharge on incomes over $5 million and other high-end income tax increases would also narrow gaps in wealth as incomes at these levels tend to be generated largely from existing wealth that is already concentrated in hands of wealthy white families. As with the other measures just described, the revenue raised by this change would be put toward efforts such as lowering the cost of childcare, boosting stagnant incomes, and expanding access to paid family leave and sick leave. Paid family leave, for example, is a lifeline for millennials of color who are taking care of relatives, but most employers don’t offer it. So, any support for paid family leave policies is crucial to helping millennials of color fully and fairly participate in the workforce, which is vital to addressing gender and racial inequities.

The Current Tax Proposals Should Be Strengthened in Some Key Respects

The bill under debate in the House would represent a major improvement over current law, but it would still largely leave in place far too much of our tax code’s bias for wealth that has fueled the yawning racial wealth disparities we see today. There are a few areas for improvement that could help redesign the tax code to make it fairer for millennials of color who are already struggling in this economy.

For example, the reconciliation bill in the House would raise the top income tax rate on realized capital gains, which are the profits individuals make when they sell assets. But the tax code would continue to exempt unrealized capital gains, which are increases in the value of assets that have not yet been sold. This may seem like an arcane issue, but it is important because unrealized capital gains make up most of the income going to some very wealthy individuals each year who, as a consequence, pay little or no tax on most of their true income each year.

A recent ITEP report finds few families receive large amounts of unrealized capital gains, and those who do are disproportionately white. Using the most recent data from the Federal Reserve, the report finds that white families made up 65 percent of families in 2019 but held 89 percent of the accumulated unrealized capital gains that year. The current rules that exempt unrealized gains from the income tax, therefore, disproportionately benefit a small number of white families and contribute to the racial wealth gap.

There are two ways policymakers can address this. One is to limit the stepped-up basis rule, which exempts unrealized gains forever when the owner of appreciated assets dies. This rule unfairly hurts Black people and other people of color since they are much less likely than white people to receive significant inheritances. This advantage for mostly white heirs spills over to highly unequal opportunities for wealth generation among millennials.

Another approach lawmakers could take would tax capital gains of wealthy taxpayers annually the way other income is taxed. Sen. Ron Wyden, the chairman of the Senate Finance Committee, has proposed what he calls a billionaires tax, applied annually to the gains in wealth of the nation’s wealthiest families. This kind of reform, sometimes referred to as mark-to-market taxation or anti-deferral accounting, would also help prevent the widening of ongoing racial wealth and income disparities by eliminating the ability of extraordinarily wealthy families to defer their tax bills for decades in a manner that the typical millennial worker could never hope to do.

Capital gains are not the only type of income flowing disproportionately to a handful of wealthy, white households. The same is true of income from pass-through businesses (businesses whose profits are included on the personal income tax returns of their owners but not subject to the corporate income tax). The 2017 tax law created a 20 percent deduction for certain pass-through business income defined as qualified business income (QBI).

The racial implications of failing to end the QBI deduction carry over to millennials of color as well. The QBI deduction overwhelmingly flows to a small group of older, high-wealth, white families who own pass-through businesses such as partnerships or S corporations. Discrimination in lending and the broader racial wealth gap have conspired to prevent the vast majority of the nation’s people of color from owning the types of large businesses that tend to receive most of the benefits of the deduction. The deduction is simply out of reach for most people of color—especially millennials of color who lack the start-up capital to launch a successful business—and it worsens racial disparities as a result.

The Perspective of Millennials of Color Should Be Elevated

Even though the tax proposals being debated as part of the current budget package would have major implications for millennials of color, their perspective in this important debate is nowhere to be found. Millennials of color are a large swath of the American population and will be impacted by any tax reform that is passed by federal policymakers. But shaping policy with them in mind means lawmakers need to think clearly about the impact their decisions will have. Overall, the proposed changes would help millennials of color, but there is significant room for improvement and it’s important that the perspective of millennials of color receive a prominent place in the next round of negotiations that will be critical in shaping the package’s final form.