New Research: Tax Policy Choices Can Narrow or Worsen the Racial Income Gap
A new report released 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,” says 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 vs. 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,” says 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.”
Read the full report at https://itep.org/taxes-and-racial-equity.
Source: Institute on Taxation and Economic Policy