Regressive taxes regenerate patterns of inequality along race and class lines

Executive Summary Historic and current injustices, both in public policy and in broader society, have resulted in vast disparities in income and wealth across race and ethnicity. Employment discrimination has denied good job opportunities to people of color. An uneven system of public education funding advantages wealthier white people and produces unequal educational outcomes. Racist policies such as redlining and discrimination in lending practices have denied countless Black families the opportunity to become homeowners or business owners, creating extraordinary differences in intergenerational wealth. These inequities have long-lasting effects that compound over time. State and local tax policies interact with this severe inequality in important ways. Revenues raised through taxes are vital to funding public investments in education, health, and the safety net, all of which can help combat inequality. But some state tax systems exacerbate racial income inequality by taxing low-income people, a disproportionate share of whom are people of color, at higher rates than other families. Such regressive tax structures can make racial income inequality worse as incomes become more unequal after state and local taxes. A progressive system for raising revenue, however, can narrow racial income gaps by asking more of families with the highest incomes, who are predominately white. When state policymakers leave immense racial and ethnic income inequality unaddressed in state tax codes, they solidify that inequality. It is difficult for policymakers and the public to fully understand the impact of tax laws across race and ethnicity in part because tax return data do not include information on taxpayers’ races. To fill this void, we have merged tax and survey data within our microsimulation tax model to allow for race and ethnicity-specific tax estimates. We use this new capacity in this report to illuminate how state and local tax policies have differential impacts across race. Consumption taxes, most notably general sales taxes, are the most regressive type of taxes relied on by state and local governments and the most significant drivers of racial inequity in state and local tax codes. Low- and middle-income families pay a larger share of their incomes in consumption taxes than the rich. While most low-income taxpayers are white because they remain a majority of the U.S. population, a disproportionate share of Black, Hispanic, Indigenous and other households of color are in lower-income groups due to the legacy of racist public policies and ongoing discrimination. So, policies that disadvantage low-income individuals and families—like heavy reliance on sales and excise taxes—have a disproportionately negative effect on people of color. Wealthier white families, who enjoy systemic advantages that have positioned them to save and build their wealth, tend to pay lower sales and excise tax rates since the portion of income set aside into savings is only taxed after a lengthy delay, if at all. Income taxes can help to address income inequality by asking more of families with higher incomes, thus narrowing post-tax income gaps between high and low-income taxpayers. Flat-rate income taxes, or those littered with carveouts for investors or other high-income families, have limited potential to reduce yawning racial income gaps. Robust, 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. Income taxes are, of course, just one part of a much larger package of policies needed to address inequality as evidenced by the fact that states with robust income taxes continue to experience severe racial income inequality even after those taxes are applied. The effect of real estate property taxes across race and ethnicity is nuanced and complex. Vast differences in intergenerational wealth and a long history of racist housing policy have allowed white households to achieve homeownership rates far beyond those in communities of color. Those forces, together with white homebuyers’ aversion to living in areas with large nonwhite populations, have also led to significantly higher market values for white-owned homes relative to those owned by people of color. These factors can lead to higher property tax payments and, as a result, better-funded schools in majority white areas. But renters, a disproportionate share of whom are people of color, also pay the property tax indirectly through their rent payments. Compounding the challenges in property tax payments, housing segregation and assessment discrimination can result in higher tax bills for people of color relative to what white homeowners in similarly valued homes pay. The overall tax level also has important consequences for racial equity, as states need robust revenues to fund deep investments in services and institutions that can advance racial and economic equity. Adequate funding for education, health, childcare, affordable housing, and other priorities is essential for moving toward broadly shared prosperity. A regressive tax code that asks the least of high-income families will struggle to raise adequate revenues during times when affluent, predominately white families, are enjoying an outsized share of all new income growth. One way this report illustrates the disparate impact of various tax policies is by comparing and contrasting taxes in Tennessee and Minnesota, two states with dramatically different tax codes. Tennessee does not levy a personal income tax, relies very heavily on sales taxes to fund public services and institutions, and does not offer any refundable credits to low-income families. As a result of these policy choices, Tennessee’s tax code is worsening racial income gaps. Hispanic and Black families are taxed at higher average rates than higher-income white residents. Relative to the statewide average, Black families tend to pay an additional 1 percent of their income in Tennessee state and local taxes while Hispanic families pay an additional 0.9 percent. Minnesota, by contrast, levies a robust personal income tax with refundable credits for low-income families and higher rates for top earners, thereby allowing the state to rely less heavily on regressive sales taxes. Minnesota appropriately taxes lower-income groups at rates slightly below the statewide average. Black families, for instance, pay a rate 0.4 percentage points below average while Indigenous families pay an average rate 0.5 percent below average, and Hispanic families’ average rate is 0.7 percent below average. White families, by contrast, pay slightly more on average because they have higher average incomes. Overall, by tending to tax people of color at slightly lower rates than white families with higher incomes, Minnesota’s tax system slightly mitigates racial income inequality. Of course, high-income households of color pay taxes above the state average and poor white families pay tax rates below the state average. And to be clear, racial income inequality remains intact post tax in Minnesota. Different tax types have varying impacts on the racial income divide, which has significant implications for reformers seeking to overhaul their tax codes. Centuries of policy advantage and privilege have led to a significant overconcentration of white families among the nation’s top earners. Because of this, tax policies designed to benefit high-income or high-wealth taxpayers—like cutting top income tax rates, affording preferential tax treatment to investors, neglecting to levy estate taxes and other forms of wealth taxation, and funding government mainly through regressive consumption taxes—primarily benefit an affluent group of families that is overwhelmingly white. Similarly, increasing sales and excise taxes to buy down income tax or property tax rates, as many states have done in recent years, tends to redistribute income away from moderate-income families of all races and mostly toward wealthier white families instead. Raising income taxes to lessen reliance on regressive sales and excise taxes can help state tax systems move toward easing the racial income divide, or at least not worsening it. Taxing the rich at higher rates is arguably the most important thing state and local governments can do to improve racial equity in their tax codes both because of the direct effect of the tax on narrowing income divides and because of the public investments made possible by the revenue that such a reform can raise. Higher taxes on top earners, a group that is disproportionately white, allow states to use their tax codes to reduce racial inequity. Socioeconomic disparities by race and ethnicity extend beyond current income levels, and it is important to account for those differences when assessing the impact of taxes on racial equity. Years of racism and discrimination across all segments of society—the housing market, labor market, financial industry, education systems, criminal justice, and other areas—have prevented people of color from building wealth on the same level as white families. Policies that advantage wealth, such as tax subsidies for investment or business income, therefore disproportionately favor white households even if income is held constant. Similarly, Black and Hispanic households are much less likely than white households of the same income level to own their homes, and this tilts certain tax policies such as the mortgage interest deduction, property tax deduction, exclusion of gains on home sales, and other homeowner-only tax breaks heavily in favor of white households. Policymakers can generate more economic and racial equity with better decisions about state and local taxes. By enacting progressive income taxes with more brackets at the top, restoring estate or inheritance taxes, taxing earnings from wealth at least as much as earnings from work, and taxing wealth itself, policymakers can meaningfully address economic and racial inequality and create a more equitable nation.