March 31, 2021

New Research: Tax Policy Choices Can Narrow or Worsen the Racial Income Gap

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A new report released today by the Institute on Taxation and Economic Policy spotlights a stark challenge confronting state and local lawmakers. Tax policy has the potential to narrow the racial income and wealth gaps, but an overreliance on inequitable revenue sources in some states indefensibly makes those gaps worse.

The research builds on ITEP’s flagship distributional analyses by merging tax and survey data to examine state and local effective tax rates by race and ethnicity. It finds that different tax types have varied effects on the racial divide, and some state tax systems are doing better at using their tax codes to address racial income inequality than others. Overall, sales and other consumption taxes contribute to widening the post-tax racial income gap while personal income taxes, depending on their structure, can mitigate racial income inequality.

“We cannot talk about how state tax systems affect the racial income and wealth gaps without acknowledging that tax systems exist against a backdrop of broader social inequities,” said Misha Hill, an author of the study. “We look at a broad swath of social inequities, current and historical, to tell a more complete story about how public policies, social practices and state tax systems contribute to the racial income gap.”

The report uses Minnesota and Tennessee as a case study to demonstrate how each state’s policy choices (e.g., a progressive income tax v. overreliance on sales taxes for revenue) disparately affect communities by race and income. Tennessee relies heavily on sales taxes to raise revenue whereas Minnesota has a robust income tax. Black and Hispanic taxpayers in Tennessee pay a higher-than-average tax rate, thus the racial income gap is worse post taxes. In Minnesota, Black and Hispanic taxpayers pay less-than-average tax rate post taxes, thus that state slightly mitigates the racial income gap.

“Centuries of racism and discrimination, up to and including the present day, have produced unconscionable gaps in wealth and income across race,” said Carl Davis, ITEP’s research director and an author of the study. “State and local taxes alone won’t be enough to end this grave injustice, but we can ease these disparities with sensible, and widely popular, reforms that ask more of those families with the greatest ability to pay.”

Key Takeaways:

  1. State and local lawmakers have a decision to make. They can levy progressive taxes to narrow racial income and wealth gaps, or they can make those gaps worse with inequitable tax policies.
  2. Tax policies that are racist in effect exist against a backdrop of historical and current injustices, from redlining (or racist housing policies) to inequitable school funding, to jobs discrimination and other social injustices.
  3. The type of tax matters. Heavy reliance on sales and excise taxes is the primary culprit leading to low- and middle-income families paying a larger share of their incomes in state and local taxes than the rich, which has a disproportionately negative effect on people of color.
  4. Progressive personal income taxes—which include meaningfully graduated tax rates, broad bases, and significant refundable low-income tax credits—are more effective at narrowing the racial income gap and raising the necessary revenue to adequately invest in communities.
  5. To reduce racial inequity, progressive tax policies must go beyond taxing income and include the progressive taxation of wealth-generating assets.


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