State income tax reform can bring us closer to racial equity – ITEP


.ITEP staff

The origins of the racial wealth gap are far from mysterious. A long history of injustices, exclusionary policies, and social practices has created an economic system that prioritizes wealth and perpetuates the historic benefits accorded to white individuals and families.

Ending these inequalities will require a concerted effort in all policy areas at all levels of government. For states, an important component of this effort should be personal income tax reform. A new ITEP report offers a roadmap for creating a fairer tax system. The report emphasizes eliminating regressive tax subsidies that deepen the racial wealth gap and replacing them with policies that strengthen the economic security of families, especially those from historically marginalized communities who are more likely to suffer. to have been left behind by our economic system. By levying higher rates on high earners, taxing investment income fairly, and using refundable tax credits to help low-income families, state tax law can move us closer to racial equity. and economical.

To pave the way for a more racially equitable future, states must move away from ill-conceived regressive policies that reinforce the vast inequalities that exist today.

There are big differences between states in this regard, both in their current tax policies and in the direction that lawmakers would like to take next. Mississippi’s legislative leaders, for example, are determined to eliminate their state’s income tax and resort to more regressive sales taxes, a move that would exacerbate Mississippi’s expansive racial and economic inequalities. In places like Washington, New York and the District of Columbia, by contrast, recent reforms to demand more from high incomes and to increase the take-home pay of low-income families will directly reduce racial inequalities in those places. .

The new ITEP report recommends 10 ways personal income tax reform can be used to reduce the income and wealth gap between races. As a starting point, the report recommends levying higher tax rates on higher income households. But the report also urges lawmakers to look beyond overall tax rates and careful design of income tax bases: that is, the rules that determine how different types of income are. imposed. Fair taxation of investment income from family wealth should be a top priority, as nearly 90% of the types of assets most likely to generate taxable capital gains income are owned by white families, and an overwhelming part of that is owned by a small slice of the white families up there. In the same vein, the report also recommends the repeal of tax subsidies for corporate profits, retirement income and homeowners.

Lawmakers should build on recent successes at the federal and state levels in using refundable tax credits to help low-income families. Policies such as the Working Income Tax Credit (EITC) and the Child Tax Credit (CTC) improve the economic security of a diverse group of families from many different races or ethnicities, but they can be particularly powerful for Blacks, Hispanics, Native people and others. people of color historically excluded from equal economic opportunity.

Tax credits for low- and moderate-income renters are a particularly promising option for reducing racial disparities, as a disproportionate share of this group is made up of households of color. Because renters are much more likely than landlords to have low levels of overall wealth, targeting a tax credit specifically towards renters can be an effective way to reach historically marginalized communities that have been denied the opportunity. to create significant wealth. The report finds that black households, for example, are 2.6 times more likely than white households to be renters with income below the median level.

A well-designed personal income tax generates significant income to fund public services, demands more from wealthy families, and increases the income of families facing difficult economic circumstances. A tax that achieves all of these goals offers one of the most promising ways to begin tackling racial inequalities in income and wealth through the tax code. While state income tax reform alone will not bring racial equity, it can be a productive part of a larger effort to do so.

Read the report

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