Tax policy can be a powerful tool for enhancing racial and ethnic equity, but two new reports show how recent tax changes at the state and federal level have disproportionately blocked households of color from receiving tax cuts, even as they protected or expanded tax cuts aimed at wealthy, white households.
State and federal tax systems affect taxpayers of different races differently, even when those policies don’t explicitly mention race. A new report from the Center on Budget and Policy Priorities, “How the Federal Tax Code Can Better Advance Racial Equity” explains how seemingly “race-neutral” provisions in the tax code can reflect racism and bias:
“Historical racism and continuing racial prejudice and discrimination, through both public policies and private acts, have helped to shape factors that determine households’ tax liability, such as their income, wealth, and consumption. Racial barriers to economic opportunity have played a substantial role in determining today’s income and wealth distribution, in which households of color are overrepresented at the bottom of the scale while non-Hispanic white households are heavily overrepresented at the top. Thus, the tax code, specific tax provisions, and the way the code is administered and enforced can affect different races and ethnicities in widely disparate ways, and changes in tax policy and administration can widen or narrow racial disparities.”
The federal tax code, taken as a whole, reduces racial disparities. But the federal tax cut law that was passed in 2017 moves the federal tax code in the wrong direction, sending most of the tax cuts to people with high incomes, who are disproportionately likely to be white. The CBPP report notes that:
- White households in the highest-earning 1% receive $1 out of every $4 of the 2017 law’s total tax cuts, far more than the $1 out of every $6 that the bottom 60% of households of all races receive.
- The law deeply cuts the corporate tax rate, benefitting wealthy shareholders who are typically white.
- The law doubles the value of estates that are exempt from the estate tax, from $11 million to $22 million per couple. This makes it easier for the extremely wealthy – a small group that is far more likely than the general population to be white – to pass along inherited wealth to another generation.
In contrast, the 2017 law treats low-income households, which are more likely to be households of color, as an afterthought. The report notes that:
- Tax cuts for the bottom 60% of households are worth only about 1.1% of their pre-tax income, compared with a 2.6% tax cut that households in the top 1% receive on their much higher income;
- The tax law expanded the Child Tax Credit, but the increase largely or entirely excluded 11 million children in low-income working families, while increasing the income limit for eligibility so that additional wealthy families could claim the credit; and
- The tax law eliminated the Child Tax Credit for 1 million children in low-income working families because they lack a Social Security number. These children are typically undocumented “Dreamers” whose parents brought them to the U.S. in search of a better life.
State tax laws also affect racial equity, as a new report from the Wisconsin Budget Project demonstrates. The report, Missing Out: Residents with Low Incomes Pay More Under New Budget, shows that Wisconsin’s 2019-21 budget protects the preferential tax treatment given to Wisconsin’s wealthiest households, despite the efforts of Governor Evers to rein in tax loopholes that mostly serve to cut taxes for the top 1%.
Households with low incomes will actually wind up paying more in taxes and fees under the budget than they did previously, due to increases in transportation fees and the expansion of the sales tax to more items. Due to a long history of employment discrimination, unequal educational opportunities, and lack of public investment in communities of color, African-American and Latinx households are over-represented among households with the lowest incomes and thus are more likely to pay more under the 2019-21 budget than white households.
The additional taxes and fees paid by low-income households under the 2019-21 budget add up to $15 a year on average. While that’s a relatively modest increase, it stacks on top of a system that already requires households with low and moderate incomes to pay a much higher share of their income in state and local taxes than the wealthiest households. As a result of this imbalance, low- and medium-income households and households of color essentially subsidize the lower effective state and local tax rates paid by the top 1% in Wisconsin.
Improvements to federal and state tax laws have the potential to reduce racial disparities in income and wealth. For that to happen we need to close loopholes that benefit wealthy, typically white households, and expand credits that go to households and families with low and modest incomes. The recent changes described here have done the opposite, moving us farther from a tax system that promotes opportunity for all and makes it easier for families and communities of color to prosper.
Originally published on wisconsinbudgetproject.org
Help support the Wisconsin Budget Project with a donation. The organization is engaged in analysis and education on state budget and tax issues, particularly those relating to low-income families. It seeks to broaden the debate on budget and tax policy through public education and by encouraging civic engagement on these issues.