Tax breaks are not race-neutral

September 13, 2023By Daniel Hauser

Tax breaks — officially called “tax expenditures” — can either help heal the racial divide or worsen it. In other words, tax breaks are not race-neutral.

This was made clear by a recent study released by the U.S. Department of the Treasury. The study provides some of the first estimates of the racial impact of some of the largest tax expenditures in the federal tax code. The study also shows that large numbers of white families benefit greatly from tax expenditures that reduce racial disparities — confirming that equitable policy is good for Black, brown, and white folks.

It’s a dense report, so we have summarized some of the highlights of this important study.

A number of large tax breaks worsen racial inequality

There’s no denying that there is a vast economic inequality by race and ethnicity. The wealthy in this country are overwhelmingly white and white families are also more likely to have higher incomes. None of this happened by accident. Instead, as the Coalition of Communities of Color points out in Addressing the Wealth Gap, “over generations, laws and policies have provided white families with ‘wealth starter kits’ that included ‘land, government-backed mortgages and farm loans, a social safety net, and business and education subsidies.’" Such policies enabled white families to build generational wealth but excluded families of color from the same benefits.

Given this economic reality, it’s not surprising to find that tax breaks structured to benefit those with higher incomes or greater assets disproportionately benefit white families. The Treasury analysis backs this up. White families constituted 67 percent of the tax filers in this data, and yet received:

A few key tax breaks help reduce economic inequality by race

Tax expenditures designed to help low-income to middle-income working families disproportionately help families of color. As a baseline, in the Treasury study, Hispanic families were 15 percent of families in this analysis and Black families were 11 percent.

Equitable tax policy is good for white families

While tax expenditures like the EITC and the Child Tax Credit are the kinds of policies that help reduce racial inequality, they also lift up many white families struggling to make ends meet. Roughly half of the beneficiaries of the EITC are white, as are two-thirds of the families benefiting from the Child Tax Credit.

More research is needed in the area of tax policy and race

The Treasury study, while robust, is imperfect. The authors used available data to estimate race based on the tax filer's name, tax information, and zip code, and due to these limitations could not accurately estimate values for multiracial, Asian, or more specific racial and ethnic groups. While this methodology has been tested in other arenas, it’s not hard to imagine how this is going to misalign with people’s self-reported racial and ethnic identities.

That’s why Oregon has chosen to add an optional question on racial and ethnic identity to state tax forms. This information will allow researchers to further explore how the tax system as a whole, and specific policies, impact racial equity.

Posted in Taxes.