Addressing Racial Inequity in State and Local Tax Policy
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: SALT and race. There are parts of the federal tax code that reinforce racial inequality we see in America. We've covered this in the past, and if you want to check that episode out — "The Tax Code and Economic Justice in America" — we'll link to that in the show notes. But today, we're taking a closer look at the intersection of race and tax at the state and local level and how that may play a role in maintaining structural racism in the United States. Here to talk more about this important issue is Tax Notes contributing editor Roxanne Bland. Roxanne, welcome back to the podcast.
Roxanne Bland: Thanks, Dave. It's a pleasure to be here
David Stewart: Now, I understand you recently interviewed an expert in this field on the intersection of state and local tax and racial inequality. Who did you talk to?
Roxanne Bland: I chatted with Donnie Charleston, who recently became the director of public policy and advocacy at the group E Pluribus Unum, a nonprofit whose mission is to build a more just, equitable, and inclusive American south. He was formerly the director of state and local fiscal policy management at the Urban-Brookings Tax Policy Center.
David Stewart: Great. So what sort of issues did you discuss?
Roxanne Bland: We talked about the role of SALT and maintaining racial wealth gaps in the U.S., and what some localities are doing to address it.
David Stewart: All right. Let's go to that interview.
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: So, I think 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. So, typically we focus on the federal level and we focus on issues of, you know, the progressivity or the regressivity of the tax system from the standpoint of, you know, which taxes are regressive versus progressive. And then that filters down to the state and local level as well. But in reality, that's the kind of thing really the top level analysis. I think there's a need, you know, to look beneath that and look at the interaction of all the different taxes that we pay.
And we look at it from a standpoint of, you know, 36 cents out of every tax dollar we pay goes to state and local governments. And so, that's a huge amount of money that we're paying out annually that, you know, little attention is paid to with respect to the question of how state local taxes interact with the race at the local level. I mean, if you look at the federal level, we don't collect data on race from the standpoint of federal taxes. So, Treasury has no clue regarding how taxes are disproportionately affecting different groups across the nation with respect to race. And the same issue is true at the state level as well.
And so, there are a lot of holes and gaps in our knowledge base about how those issues interact together. But, there are some clear things that we do know regarding, you know, how different taxes impact different groups of people. And 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: OK. So, you're saying that the issue has been discussed at the federal level, even though Treasury doesn't know the makeup of the taxpayers, the racial makeup of the taxpayers. And we haven't talked a lot about it on the SALT side. But why do you think we really haven't talked about it on the SALT side?
Donnie Charleston: I think part of it is just the disposition of economists and researchers and the tendency to focus at the federal level. I mean, in part, some of that is warranted, given, like I said, that 64 percent of every tax dollar that we spend is at the federal level. So they're the big elephant in the room from the standpoint of their ability to address issues related to equity from the standpoint of just the spending power of the federal government.
But when we look at the state and local level, like I said, there's a lot of things that we don't know that really kind of curl beneath that. But I think really to the disposition of economists and people kind of look at the federal level and to some extent also just a lack of researchers who really dive deep into, you know, those arcane issues. Regarding for example, reevaluation and tax assessment at the local level and how that impacts people of color, for example. I mean, so there's a lot of arcane issues that people don't tend to focus a lot of attention on and tend to, I think, just the disposition to folks at the federal level.
Roxanne Bland: So, why do you think that is? 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. Not that there aren't people who are looking at it because there are some people doing some really great research at that level. But I think part of it, I think is just the disposition from a standpoint of the disciplines that really kind of dive into it. And so I think that's the biggest issue. But other than that, I mean, I think it's just people not having great insight into, you know, how those issues play out at the local level. So there's a need to kind of, I think, at this point from a different level, to really provide researchers, or really, I think to push and produce more researchers at the academic level for example, from universities, who are interested in some of these issues. Not to say that there aren't some, but when we look at this question around race and local taxes, far fewer people who are really looking at that issue in an in-depth way.
Roxanne Bland: Well, perhaps that's because, you know, the issue is kind of new. I remember when I started out, nobody paid attention to local tax, state and local tax. And now they do, but that's over a span of 40 years. So, maybe in the near future, we'll start to see some interest, some more interest and some 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? And how do you think they can best be reformed?
Donnie Charleston: Oh, so that's a great topic I think by and large. So, annually, you know, states and local governments are spending billions of dollars in tax expenditures. So, when we're talking about tax expenditures, we're talking about money that is forgone by state local government. So it's money that they don't collect because they're providing tax abatements or other carveouts for developers or specific groups of individuals. And they are not collecting that revenue. And so, that's a whole other area that we don't, you know, do a lot of research on collectively. But like I think there's some great research out there. And I think by and large, I think states should be taking a look at their tax incentives to examine, you know, what are they asking corporations for in return for that, for those benefits. In most cases, states aren't asking or, and local governments, aren't asking a whole lot of communities.
So, there's this question of the cost-benefit analysis from standpoint of the number of, 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. So, it's in commuters come from those communities, people who already have jobs in those communities. When you look at people who are unemployed in those communities, typically they make up a fraction. Less than 10 percent of the people who actually assume those new jobs come into a community. And that's just one clear example.
And so, I think states and local communities would do well to increase their average from the standpoint of ensuring that those benefits, from standpoint of jobs, accrue to those communities and individuals in those communities that need it most. Additionally looking at issues around, you know, clawbacks, looking at issues related to sunset provisions from the standpoint of a corporation ideally should not be able to receive a tax benefit in perpetuity.
There should be some type of cap placed on that. When we look at the research, it shows that those benefits typically, when they have sunsets on them from the standpoint of not lasting forever before a short time period, they're more likely to influence behavior as opposed to tax incentives that, you know, have no sunset provisions at all because you know, it related in part to how corporations discount future earnings. I mean, so there's a whole lot, 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, that's doing some really great work from the standpoint of how they're evaluating their tax incentives actually holding corporations accountable for their assumption of those incentives when they come into that particular city.
Roxanne Bland: Well, tax incentives are certainly one of my favorite topics, and I love to rant and rave about them. I don't like them because they are unfair. They're unfair to the community. And they're unfair to the taxpayers in general, not just the community, but all over the state.
Let's go on to zoning issues. You know, we have heard in the news about chemical plants and so forth, you know, dirty industries, being zoned to operate adjacent to Black and Brown communities. So, 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. So, you're approaching a topic that, you know, is really at the intersection of zoning, tax incentives, and environmental racism. And so, there's a lot of research needs to be done, you know, that kind of brings researchers together across those three different disciplines.
I think for me, one of the major issues to look at in particular because, you know, part of our work is focused — well most of our work at this point is focused on the American south — is looking at this question of, you know, zoning and how municipalities decide who is part of a city and who is not part of a city. And this is question of, you know, the boundaries and where they draw the city boundaries.
And historically in the American south, what we've seen is that cities have something called underbounding. It's called municipal underbounding, where they will draw city boundaries to bring in wealthy suburban areas that are typically whiter than low-income minority areas. And so, those low-income minority areas don't get the benefit of water and sewer lines and access to amenities and other tax incentives that would be put out so that those communities could then develop economically. And so, you see those communities just remaining impoverished because of how those cities draw their municipal boundaries. And so, it kind of just, 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. Which, you know, of course intersects with this issue of like the zoning from the standpoint of the boundaries, from the standpoint of, you know, what type of commercial activity is allowed in those boundaries, the city boundaries that they've been drawn, whether or not the home values appreciated those communities. And so, what you see is that those communities don't prosper as well because they aren't part of a city jurisdiction, because they don't have the tax incentives put in place to allow development. So, 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. Let's talk about 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. I mean, from the standpoint of 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. If you don't have the necessary individuals who are representing you in a state house, for example, or at the federal level, then you're not going to see those benefits accrue to your community. And so, when we see communities that are gerrymandered from the standpoint of having pockets of people of color drawn into one boundary, so as to satisfy the idea that, well, we have that one representative color, we know we're going to get that representative by drawing these boundaries, this small boundary or the real, I don't know how to describe them, but they look like salamanders in some cases or other, you know, convoluted games to create these jurisdictions that have people of color and then something representative of color for a state house. Where that one of the benefits they had received and what you've also done is you've basically created, on the other side, districts that are predominantly white or predominantly one party or another. And so, what you end up doing is having token representation in legislatures and so 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. And if you would, can you give us a couple of examples of what they are? And tell us how they've impacted Black and Brown communities?
Donnie Charleston: Well, so historically if you look at special taxing districts, I mean, you know, I think you have to lump in there, you know, school districts as well. And you look at this nation emerging out of Reconstruction, what you saw was a proliferation of the number of special taxing districts across the country as, you know, white communities start to create essential enclaves, where they would have their own tax dollars protected if you will. Because they didn't want their tax dollars spent on individuals who were newly freed individuals in America. And so they created, you know, carved out small towns, carved out special school districts, just so that they would have their tax dollars remaining with themselves and not going to benefit people of color. And so, we see a proliferation of them beginning in that time period on up through the middle of the 1900s and an acceleration of them there again, and during the Civil Rights movement in the aftermath of the Brown v. Board of Education decision. And so, there was some clear examples of how those districts have been used to increase segregation, to wall off, if you will, tax dollars such that they will only benefit one group of people relative to another group of people. And so, that's something that is little studied in America from standpoint at this intersection between these special taxing districts. Like I said, there are a number of different types of them across the country and how that impacts communities of color.
Roxanne Bland: So, what do we do to address the problem? Can school districts, or just the special districts in general, can they be dissolved? Can the state move their boundaries to include communities of color?
Donnie Charleston: Probably not. That's the thing about it from a standpoint of 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, once they're put in place, there's not a whole lot that a state legislature can do in many cases. And so, what it really requires is for people at the local level to really come together, to figure out how communities can create more equity from the standpoint of how they're taxing their citizens and where that revenue is going.
At the state level, there again, though, I think there is. And where you see some of this happening, in particular with respect to school district, is states creating expenditure models that actually address issues of inequity at the local level. And so their premise on this idea of the ability of a community, of a city or county, to levy taxes, looking at its tax base, and allocating revenues based on that. So, on some level, there are some things that states can do. And we see a lot of that happening, particularly around this question of schools. And in some areas as well, looking at the tax and capacity of local communities and allocating state revenue based on that taxing capacity. So, I think probably there is a need nationwide to push for more of that type of model from standpoint of state and their allocations. As opposed to just, you know, models that are based on population for example.
Roxanne Bland: That makes me think about 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, you know, unincorporated townships or something like that. That would be an interesting question.
All right, 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: Yeah, so that's a very interesting development. And I think it was last year where the city of Evanston, which is in Illinois, that decided that the new revenue that they were able to garner through the legalization of marijuana, they were going to use it to fund reparations. And I think they've actually said that they're going to allocate of $10 million collected in tax revenue from cannabis sale to provide African American residents with, 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. And interestingly, what they're doing is they're saying to qualify for that money, the individual has to be a resident of Evanston between 1919 and 1969 or a direct descendant of one of those individuals. And what they're really doing is really pointing it to this time period in America, from the standpoint of individuals in the aftermath of Reconstruction and the Jim Crow era and everything that was happening in this country, particularly around redlining and so forth and trying to provide a benefit directly to those citizens. They are probably, 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. 1919, the bloody summer for people of color. The city of Asheville 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. So, I think they're in the process of still studying what they're going to do from the standpoint of identifying that revenue strength to then address those ills. And I think at least the conversation that I'm aware of so far are really around that, what you, you know, this issue that you just framed from standpoint of, you know, 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, you know, articulating a very clear mechanism and policy lever to affect that change with respect to reparations.
Roxanne Bland: Well, at least they made a start and that's a good thing. Let's go back to the big picture. What do you believe is a solution, a possible solution, the 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? And on the question of nonprofits, I will note that there are already lots of nonprofits that are interested and are working on these issues. You know, how effective have they been?
Donnie Charleston: In short, it's all of the above. And so, 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. And we need citizens who are activated and motivated and educated around these issues so that they can petition for redress at the local, state, and federal level. And so, I think it takes all of those different mechanisms to affect change that's going to be required.
So, in some cases, we're not talking about educating the individuals who are already, you know, woke, so to speak. We're talking about educated individuals who are resistant or who just don't have the knowledge. And that's a much harder deal and much harder hill to climb from the standpoint of that's just basic education. And from standpoint of providing individuals with data and insight about what's going on in their community. It's addressing issues that people have in their heads from the standpoint of the idea that just because one community benefits from the standpoint of people of color, it means that other people are going to lose out. Typically that's white citizens who have political power and clout.
And so, we have to dispel that myth that just because one group of individuals advances that means another group is going to not advance. And so, that's part of it as well. And it speaks to how we frame issues, that speaks to the research, that speaks to providing individuals with, or creating rather, conversations where individuals are able to put everything out on the table and be able to at the same time, you know, have their assumptions confronted with real insight and research. And so it's hard work. And fortunately, as you said, many nonprofits are on the ground, really doing some of this work. But many of them aren't really equipped to really deal with that hard work of challenging assumptions, of doing the research piece as well of framing narrative. And that takes, you know, a very dynamic organization. It takes a group of, you know, very dynamic individuals working for that organization as well. And so, I think that's the rub. How do we increase the capacity of local nonprofits to do that type of work?
Roxanne Bland: Interesting. You know, 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. And 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, you know, taboo from the standpoint of just discussing issues around reparations, discussing issues around structural racism. And so 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, you know, nibbling around the edges. You want to talk about small policy changes. But I think it's time to really discuss structural changes when we talk about things like, you know, where are we drawing our tax revenue from, how are we taxing individuals, and not just the spending side, but 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: Well thank you, Donnie, for joining us today. And 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.
David Stewart: Now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?
Faye McCray: Thank you, Dave. In Tax Notes Federal, Tyler Johnson, John Hildy, and John Horne examine a recent decision by a federal district court regarding a cost-sharing agreement put in place by Microsoft. Jasper Cummings, Jr. reviews the Supreme Court’s 2019-2020 term in tax. In Tax Notes State, David Bertoni, David Swetnam-Burland, and Nathaniel Bessey discuss arbitration agreements and false claims acts. Stanley Kaminski argues that Illinois’s new retailers occupation tax scheme discriminates against out-of-state retailers and sales in violation of the U.S. Constitution’s commerce clause. In Tax Notes International, Philip Wolf and Davira Chairunnisa examine the challenges of taxing tech companies that have limited or no physical presence in a jurisdiction. Andrew Hughes discusses issues arising when switching between OECD local files and IRC documentation. And on the Opinions page, Robert Goulder examines recent progress in implementing the EU’s Anti-Tax Avoidance Directive. Joseph Thorndike reviews a new book by Jim Tankersley on America’s middle class. Benjamin Willis and Jed Bodger examine how the Biden-Harris proposed corporate tax and long-term capital gains rates increases lead to eliminating the section 199A passthrough deduction.
David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at firstname.lastname@example.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.
All content in this broadcast is protected under U.S. and international laws. Copyright © 2020 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved.