Tax Notes contributing editor Roxanne Bland chats with Donnie Charleston, the public policy and advocacy director of the nonprofit E Pluribus Unum, about how state and local tax policies can exacerbate racial inequity and what some communities are doing to address it.
This post has been edited for length and clarity.
Roxanne Bland: Thanks for joining us today.
Donnie Charleston: Thank you for having me.
Roxanne Bland: You've been studying and researching the intersection of critical tax theory and state and local tax, which we in the business call SALT. Can you give us a short overview of the role SALT has played in creating and maintaining structural racism in the United States?
Donnie Charleston: If you look at it from the top to the bottom, you're talking about essentially the interaction between both federal taxes and state and local taxes. Typically we focus on the federal level and issues of the progressivity or the regressivity of the tax system from the standpoint of which taxes are regressive versus progressive. That filters down to the state and local level.
But in reality, that's the the top level analysis. I think there's a need to look beneath that at the interaction of all the different taxes that we pay. Thirty-six cents out of every tax dollar we pay goes to state and local governments. That's a huge amount of money that we're paying out annually that little attention is paid to with respect to the question of how state local taxes interact with the race at the local level.
If you look at the federal level, we don't collect data on race from the standpoint of federal taxes. The Treasury Department has no clue regarding how taxes are disproportionately affecting different groups across the nation with respect to race. The same issue is true at the state level as well.
There are a lot of holes and gaps in our knowledge about how those issues interact together. But there are some clear things that we do know regarding how different taxes impact different groups of people.
We know that consumption tax, for example, hits low-income people in particular the hardest and are very regressive. If we look at states that are more reliant on those types of taxes, those are the states that have tax systems typically that are not necessarily aligned with the interests of economic mobility of low-income people and people of color typically.
Roxanne Bland: You're saying that the issue has been discussed at the federal level, even though Treasury doesn't know the racial makeup of the taxpayers. We haven't talked a lot about it on the SALT side. Why do you think that is?
Donnie Charleston: I think part of it is just the disposition of economists and researchers and the tendency to focus at the federal level. Some of that is warranted given that 64 percent of every tax dollar that we spend is at the federal level. They're the big elephant in the room because of their ability to address issues related to equity from the standpoint of the spending power of the federal government.
But when we look at the state and local level, there's a lot of things that we don't know. To some extent it's also just a lack of researchers who really dive deep into those arcane issues like tax assessments at the local level and how that impacts people of color. There's a lot of arcane issues that people don't tend to focus a lot of attention on.
Roxanne Bland: Why are there so few people who are willing to look at the SALT side of things?
Donnie Charleston: That's a good question. I don't really have a great answer for that. There are some people doing really great research at that level. But I think part of it is just the disposition from a standpoint of the disciplines that really kind of dive into it. I think that's the biggest issue.
I think it's just people not having great insight into how those issues play out at the local level. There's a need to really to push and produce more researchers at the academic level from universities who are interested in some of these local issues. Not to say that there aren't some, but when we look at this question around race and local taxes, far fewer people are really looking at that issue in an in-depth way.
Roxanne Bland: Perhaps that's because the issue is kind of new. I remember when I started out, nobody paid attention to state and local taxes. Now they do, but that's over a span of 40 years. Maybe in the near future we'll start to see some more interest and more research.
Donnie, let's look at this through the lens of state and local budgets as a whole. What type of tax expenditures do you think would be most helpful to the Black, brown, and other underrepresented communities? How do you think they can best be reformed?
Donnie Charleston: That's a great topic. Annually states and local governments are spending billions of dollars in tax expenditures. When we're talking about tax expenditures, we're talking about money that is forgone by state local government. It's money that they don't collect because they're providing tax abatements or other carveouts for developers or specific groups of individuals. They are not collecting that revenue. That's a whole other area that we don't do a lot of research on collectively.
I think by and large, states should be taking a look at their tax incentives to examine what they are asking corporations for in return for those benefits. In most cases, states and local governments aren't asking a whole lot of communities.
There's this question of the cost-benefit analysis, typically focusing on the number of jobs that accrue to a community and so forth. But typically when you look beneath that and analyze who actually is the beneficiary of those jobs, oftentimes it's not people who live in those communities. It's commuters who come from other communities. Less than 10 percent of the people who actually assume those new jobs come into a community. That's just one clear example.
I think states and local communities would do well to increase their average of ensuring that those benefits and jobs accrue to those communities and individuals that need it most. Additionally, they should look at issues around clawbacks and related to sunset provisions. A corporation ideally should not be able to receive a tax benefit in perpetuity. There should be some type of cap placed on that.
Research shows that when there are sunset provisions, they're more likely to influence behavior because it relates in part to how corporations discount future earnings. There's a whole host of research that provides a slew of ways that states and local governments can actually modify what they're doing.
I think one great example is the city of Austin, Texas. It's doing some really great work evaluating their tax incentives and actually holding corporations accountable for their assumption of those incentives when they come into that particular city.
Roxanne Bland: Tax incentives are certainly one of my favorite topics. I love to rant and rave about them. I don't like them because they are unfair. They're unfair to the community and to taxpayers in general.
Let's go on to zoning issues. We have heard in the news about chemical plants and so forth being zoned to operate adjacent to Black and brown communities. What other zoning issues should be considered and addressed?
Donnie Charleston: That's another great topic that people have done quite a bit of research on from a standpoint of zoning. I think the missing piece of that is an intersection between zoning and taxation. You're approaching a topic that is really at the intersection of zoning, tax incentives, and environmental racism. A lot of research needs to be done that brings researchers together across those three different disciplines.
For me, most of our work is focused on the American south and looking at this question of zoning and how municipalities decide who is part of a city and who is not. This is a question of the boundaries and where they draw the city boundaries.
Historically in the American south, we've seen cities have something called municipal underbounding, where they will draw city boundaries to bring in wealthy suburban areas that are typically whiter than low-income minority areas. Those low-income minority areas don't get the benefit of water and sewer lines and access to amenities and other tax incentives. You see those communities remain impoverished because of how those cities draw their municipal boundaries.
You see this layering on an exacerbation of the historical legacy of redlining and so forth because of how those cities are drawing their boundaries around different communities. This of course intersects with the issue of the zoning from the standpoint of the boundaries. What type of commercial activity is allowed in those city boundaries that they've been drawn?
What you see is that those communities don't prosper as well because they aren't part of a city jurisdiction. They don't have the tax incentives put in place to allow development. They see their home values growing at a much slower rate, if at all, compared to the communities that are drawn into city boundaries.
Roxanne Bland: Very interesting. Let's talk about an issue that may be related: gerrymandering. As we all know, that's been pretty much on the rise across the nation. Does gerrymandering play any role in maintaining racial inequality by the tax code?
Donnie Charleston: Most definitely. When you talk about political participation and the ability of people of color to obtain redress and to obtain the necessary investment in their communities and you don't have the necessary individuals representing you in a state house or at the federal level, then you're not going to see those benefits accrue to your community.
We see communities that are gerrymandered with pockets of people of color drawn into one boundary, so as to satisfy the idea that we have that one representative color. We know we're going to get that representative by drawing these boundaries. These convoluted games to create these jurisdictions that have people of color and then something representative of color for a state house.
What you end up doing is having token representation in legislatures and those individuals aren't able to amass the necessary political capital and number of individuals who could possibly then obtain redress for them in a state house or state legislature around issues of taxation.
Roxanne Bland: Let's move on to special districts. They are independent, special purpose units. They exist separately from local governments like cities, municipalities, and townships. Tell us a little about these.
If you would, can you give us a couple of examples of what they are? Could you tell us how they've impacted Black and brown communities?
Donnie Charleston: Historically if you look at special taxing districts, I think you have to lump in school districts as well. If you looked at this nation emerging out of Reconstruction, what you saw was a proliferation of the number of special taxing districts across the country as white communities started to create essential enclaves where they would have their own tax dollars protected. They didn't want their tax dollars spent on individuals who were newly freed individuals in America. They carved out small towns and special school districts just so they would have their tax dollars remaining with themselves and not going to benefit people of color.
We see a proliferation of them beginning in that time period on up through the middle of the 1900s, and an acceleration of them during the Civil Rights movement in the aftermath of the Brown v. Board of Education decision. There were some clear examples of how those districts have been used to increase segregation and wall off tax dollars such that they will only benefit one group of people.
That's something that has not been studied much in America from the standpoint of special taxing districts.
Roxanne Bland: What do we do to address the problem? Can school districts, or just the special districts in general, be dissolved? Can the state move their boundaries to include communities of color?
Donnie Charleston: Probably not. That's the thing about it. When you look at how people mobilize themselves at the local level and create independent taxing districts, in many cases there's very little that state legislatures can do to dissolve these communities. In some states, they have more power than in others. But once they are instituted, there's not a whole lot that a state legislature can do in many cases.
It really requires people at the local level to come together and figure out how communities can create more equity in how they're taxing their citizens and where that revenue is going.
On some level, there are some things that states can do. We see a lot of that happening particularly around this question of schools. In some areas, they're looking at the taxing capacity of local communities and allocating state revenue based on that taxing capacity. I think there is a need nationwide to push for more of that type of model from standpoint of state and their allocations.
Roxanne Bland: That makes me think that maybe research can be done on state constitutions to see what the distribution of power is between state and local governments. For example, home-rule cities versus unincorporated townships or something like that. That would be an interesting question.
Let's look at what some cities are doing on the local level to address racism in the tax code. I read that Evanston, Illinois, has made a decision to fund reparations with tax revenue from marijuana sales. Can you tell us about this and its potential impact?
Donnie Charleston: That's a very interesting development. Last year the city of Evanston decided that the new revenue they were able to garner through the legalization of marijuana would be used to fund reparations. They've actually said that they're going to allocate of $10 million collected in tax revenue from cannabis sales. I think initially they're going to spend it on housing assistance and economic development, so they can provide a $25,000 direct benefit payment to purchase a home for African American residents in that community.
Interestingly, they're saying to qualify for that money, the individual had to be a resident of Evanston between 1919 and 1969 or a direct descendant of one of those individuals. What they're really doing is really pointing it to this time period in America, from the aftermath of Reconstruction and the Jim Crow era and everything that was happening in this country, and trying to provide a benefit directly to those citizens.
They are, if I'm not mistaken, the only community that I'm aware of in the country that is levying a tax and directing that revenue specifically for reparations for people of color.
Roxanne Bland: That's interesting. The city of Asheville, North Carolina, is also doing something like that. They're going to use tax revenue again to fund reparations. What form will that take? Will that be a cash grant like Evanston? Or will they invest in the community through educational and job opportunities?
Donnie Charleston: I think they're still figuring that out. They really haven't identified any specific tax sources that they're going to draw that money from to address additional reparations. I think they're in the process of still studying what they're going to do and identifying that revenue strength to then address those ills. The conversations that I'm aware of so far are really around that, pinpointing it towards specific social issues in that community. But I think they are a ways from being where Evanston is from the standpoint of actually articulating a very clear mechanism and policy lever to affect that change with respect to reparations.
Roxanne Bland: At least they made a start. That's a good thing.
Let's go back to the big picture. What do you believe is a solution that can be done to address racial inequality because of SALT policy? Is it diversity in local leaders? Is it nonprofits with a special interest in resolving the issue? On the question of nonprofits, I will note that there are already lots of nonprofits that are interested and are working on these issues. How effective have they been?
Donnie Charleston: In short, it's all of the above. We need more nonprofits that are on the ground really doing this work. We need people who are in elected positions of power and authority to actually pull the levers of change. We need citizens who are activated, motivated, and educated around these issues so that they can petition for redress at the local, state, and federal level. I think it takes all of those different mechanisms to effect change that's going to be required.
In some cases, we're not talking about educating the individuals who are already woke. We're talking about educated individuals who are resistant or who just don't have the knowledge. That's a much harder deal and much harder hill to climb because that's just basic education and providing individuals with data and insight about what's going on in their community. It's addressing issues that people have in their heads the idea that just because one community benefits, it means that other people are going to lose out. Typically that's white citizens who have political power and clout.
We have to dispel the myth that just because one group of individuals advances that means another group is going to not advance. That's part of it as well. It speaks to how we frame issues, to the research, to creating conversations where individuals are able to put everything out on the table and be able to at the same time have their assumptions confronted with real insight and research. It's hard work.
Fortunately, many nonprofits are on the ground doing some of this work. But many of them aren't really equipped to deal with that hard work of challenging assumptions, of doing the research piece as well as framing narrative. That takes a very dynamic organization and a group of very dynamic individuals. I think that's the rub. How do we increase the capacity of local nonprofits to do that type of work?
Roxanne Bland: Interesting. I also wonder if it will take us a moment to reflect and look on the competition philosophy that underlies this national mindset we have. That if you cut the pie and take a piece, there's going to be less for everybody else, even if that's not true.
Donnie Charleston: We're at a pivotal moment in our country's history where many issues are coming to the fore that previously were taboo like reparations and around structural racism. I think we're at a moment in time where it's time for people to educate themselves. It's time for people to push for change, and not just small change, but really look at structural change.
I think a lot of times we want to talk about nibbling around the edges. You want to talk about small policy changes. But it's time to discuss structural changes when we talk about things like where we are drawing our tax revenue from, how we are taxing individuals, and how those taxes are structured at the state and local level. We need to start examining that because it's only through structural change that we're really going to create long-lasting equity in this country.
Roxanne Bland: Thank you, Donnie, for joining us today. Especially these days. This is a very important issue that we all need to get our hands around.
Donnie Charleston: Thank you for having me. It was definitely a pleasure.