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Race and Class Split Finance Committee on Tax Code Disparities

Posted on Apr. 21, 2021

Senate Finance Committee Democrats and Republicans found little common ground at a hearing on addressing tax code inequalities, but both shied away from more controversial measures proposed by their star witness.

“Racial inequality is baked into how our tax laws operate,” said Dorothy A. Brown, Emory University law professor and author of The Whiteness of Wealth, at the April 20 hearing. “Not because the Internal Revenue Code has separate rate schedules by race, but because American taxpayers bring our racial identities onto our tax returns.”

However, Finance Committee ranking member Mike Crapo, R-Idaho, said it’s an open question whether “the tax code by itself leads to differing impacts across race, gender, age, or geography, or whether it’s the underlying income, wealth-asset-holding, or job-type disparities that principally cause these differing results.”

Republicans and Democrats faced off virtually, because of pandemic restrictions, along with Brown and three other panelists in what Finance Committee Chair Ron Wyden, D-Ore., called the committee’s first hearing in decades, if ever, on racial, ethnic, and gender disparities in tax law.

While Democrats talked up the American Rescue Plan Act of 2021 (P.L. 117-2) and its temporarily expanded earned income tax credit and one-year, periodic advance child tax credit anticipated to reduce child poverty up to 50 percent, Republicans defended their 2017 Tax Cuts and Jobs Act and its purported benefits for women and minorities during the pre-pandemic economy. 

Legislation to Come 

Wyden said he’s working with his Finance Committee colleagues on legislation to make the advance child tax credit permanent.

Brown called the American Rescue Plan Act expansions of the child tax credit “a sea change” that will allow low-income families to get the full EITC along with the full tax credit for each child.

Wyden said he and Sens. Maggie Hassan, D-N.H., Catherine Cortez Masto, D-Nev., and Benjamin L. Cardin, D-Md., are also introducing legislation to direct benefits toward minority- and women-owned businesses. The Providing Real Opportunities for Growth to Rising Entrepreneurs for Sustained Success (PROGRESS) Act would offer a tax incentive for sole proprietors to expand their businesses by hiring a “first employee,” he said. The bill, announced April 20, would also offer an investment credit for investing in small businesses with $100,000 or less in earnings.

Himalaya Rao-Potlapally of the Black Founders Matter Fund endorsed the proposal as helpful for bringing capital and increasing participation by different investors. Rao-Potlapally said most venture capitalists are white and sometimes have a hard time relating to Black and women business owners.

Crapo said he favored “strengthening and enhancing” the EITC, emergency access to retirement savings without tax penalties, and tax-favored Opportunity Zones in order to provide savings and access to capital for minority- and women-owned businesses. Crapo also plugged his work with Sen. Elizabeth Warren, D-Mass., on boosting funding for community development financial institutions.

Cardin touted the reintroduction of the Neighborhood Homes Investment Act (S. 98), which would address what he called appraisal gaps between the cost of renovating or building homes in a low-income community and the price at which they can be sold. 

Cui Bono? 

Republicans disagreed about Brown’s allegations of racism in the tax code, but there was little appetite in either party for some of her more radical proposals to address disparities.

“Tax income from capital at the same rate as income from wages,” Brown said. “Why should workers not have the choice to pay the low preferential rate because they earn income, as opposed to their money works for them?”

“I believe all itemized deductions should go, including the state and local tax” deduction and the home mortgage interest deduction, both of which favor wealthy white taxpayers at the expense of poor Black taxpayers, Brown said.

The Emory University professor also advocated repealing the joint tax return, which she said benefits white couples with widely disparate incomes more than Black couples, whose incomes tend to be closer.

Brown also proposed eliminating tax deferral provisions, which Wyden pointed out allow mostly wealthy white taxpayers to buy and hold stocks they can pass on to heirs tax-free on a stepped-up basis. Black people at every income level are much less likely to own, or be financially able to keep, stock accumulations, Brown noted. 

‘Mirror Image’? 

“The words Black or white or Latino or Native American don’t have to appear anywhere in the tax code for our tax laws to affect those groups differently,” Wyden said.

But Sen. Bill Cassidy, R-La., asked if Brown’s research accounted for what he called a “mirror image” of her race concerns.

Cassidy cited his own experience as a physician, saying most of his patients were Black people on Medicaid and Temporary Assistance to Needy Families, and in taxpayer-funded public schools, compared with his non-Black patients paying for parochial or private schools.

Those taxpayer-funded benefits accrue “to those who are of color, which is financed, if you will, by those who would not be of color,” Cassidy said. 

“If we’re going to say that the benefits of the exemptions benefit those who make more money and they just happen to be white, then it’s probably fair to say that the benefits of these social safety net programs accrue to those of color,” Cassidy said. “Not because they are of color, but because they meet the need otherwise.”

Sen. Sherrod Brown, D-Ohio, said it’s impossible to know exactly how tax law and administration affect people of color because the IRS doesn’t gather that data.

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