Race-Neutral Taxation: Using Disparate Impact Theory to Ensure Racially Equitable Taxation
“If we are to attain a true and full understanding of civil rights in this country, it must encompass not only political and legal rights, but also economic rights.”[1] — Richard Cordray, Former Director of the Consumer Financial Protection Bureau
The plight of the black American struggle for civil rights in this country is a familiar story to the average American citizen. The horrors of chattel slavery are revisited upon our national consciousness every Black History Month. Pop-history would have you believe that that Abraham Lincoln “freed the slaves” in the Civil War and that the Civil Rights Movement guaranteed the equality of black Americans under the law. This rose-tinted societal view of the long march to freedom for black Americans culminates with the election of Barack Obama as the President of the United States. While these moments are undoubtedly watershed moments in black American history, they unfortunately fell short of guaranteeing black people a truly equitable place as co-citizens in American society.
The 14th Amendment guaranteed citizenship to black Americans, whether slave or free, when the Civil War ended. Unfortunately, the 14th Amendment doesn’t truly define what “citizenship” means.[2] Even today, the precise definition of what citizenship entails remains elusive. The United States Citizenship and Immigration Services, the federal agency tasked with processing and approving naturalization petitions, does not articulate a clear definition of what citizenship means. Its website merely remarks summarily that new citizens “are rewarded with all the rights and privileges that are part of U.S. citizenship” without further elaboration of what those rights and privileges are.[3] Presumably, those privileges are, at a minimum, the right to participate in the political, legal, and economic systems that form the foundation of American society. Unfortunately, as this article will demonstrate, equitable participation in American society is not yet a reality for many black citizens.
The fiction of a post-racial society, where all citizens are treated equally under the law, is regrettably not a reality in the United States. While today’s younger generations of black Americans do, in many respects, live in an American society much more equitable than the ones their parents and grandparents lived in, significant impediments to true equality continue to persist today. Let’s face it, if you’re reading this article, you likely already know that black Americans face challenges exercising their political, social, and economic rights as citizens. Unfortunately, in many cases, state and local governments themselves are the entities depriving black citizens’ ability to exercise their rights.
Politically, despite the guarantees of the Voting Rights Act of 1965, many black Americans still do not participate equally in American political life. For example, consider the issue of racial gerrymandering. Many states draw political boundaries in ways that partially disenfranchise black voters; these state governments “pack” districts based on race. This state-sponsored political “packing” dilutes the power of black voters to have an effect in multiple (and most likely more naturally drawn) districts by forcing them into one ill-fitting district.[4]
Socially, the rise of the state-sanctioned prison-industrial complex has limited the social mobility of many black Americans.[5] Black citizens are imprisoned by the state at a rate five times greater than white citizens.[6] This high rate of incarceration, when compared to the overall percentage of black citizens in America as a whole and coupled with the stigma associated with a criminal conviction,[7] undoubtedly makes it harder for black citizens to maneuver socially within American society.
The remainder of this article, though, focuses on the state government’s role in depriving black Americans of their economic rights as citizens. Title VII of the Civil Rights Act of 1964 and its successive amendments are considered as landmark pieces of civil rights legislation, and for good reason. Title VII outlawed racial discrimination in employment and, as a result, ostensibly improved the economic condition of black Americans. Not only did the Civil Rights Act of 1964 prohibit intentional, invidious discrimination in employment on the basis of race, it was later construed to prohibit actions that produced a disparate impact on workers who are members of a racial minority. The development of disparate impact theory is especially important, because it prohibits employment practices that, despite appearing facially neutral and fair to workers of any race, have an adverse effect on members of protected racial minorities.[8] This is a powerful tool to root out the types of discrimination that prohibit black Americans from exercising their full economic rights as citizens.
No one doubts the tremendous impact that Title VII had on black Americans’ ability to improve their economic condition. Title VII, though, does nothing to protect citizens’ economic rights outside of the employment context. This article aims to show that state action, outside of the employment context, has the potential to deprive black Americans of the equitable economic rights that should normatively be guaranteed as citizens. Said more directly, I argue that state governments have indirectly (or, pessimistically, have consciously) exercised their taxing powers in ways that have deprived black Americans of their economic rights of citizenship.
When many people think of taxes, they think of income taxes. Income taxes are, both theoretically and in practice, racially neutral taxes; they are assessed simply based on a person’s “ability to pay”[9] (their income), with higher earners responsible for a greater percentage of the state’s tax assessment than lower earners. States, though, have the power to assess other types of taxes. These other, non-income taxes, include property taxes and excise taxes. Although facially neutral like income taxes, I assert that states have levied property and excise taxes in ways that disproportionately affect black Americans’ exercise of their economic rights, thus depriving them of a key component of American citizenship.
As a general matter, local governments, as municipal corporations created by the state, can assess taxes.[10] Although this article will focus primarily on excise taxes, it’s important to note that property taxes can be also be levied in ways that disproportionately affect black taxpayers. For example, consider the issue of property tax assessments. Generally, local governments assess the value of property within their taxing jurisdictions annually, or at least periodically. In some jurisdictions, though, an assessor’s failure to adequately and regularly estimate the value of home prices results in inequitable taxation between homeowners owners of different races.
As an example of this phenomenon, consider the economic downturn of 2008. During this time, homeowners, in both predominately black and white neighborhoods, experienced a significant depreciation in the values of their homes. Many local assessors, though, did not decrease the assessed value of homes during this downturn. When the market began recovering, the market value of homes in predominately white neighborhoods typically recovered their lost value faster than black-owned homes in predominately black neighborhoods. Because the local property tax accessors did not reassess the value of homes during the recovery, homeowners in predominately black neighborhoods, whose property value did not recover as quickly, ended up being taxed on an assessed value much higher than the actual value of their homes. For owners in white neighborhoods, the rapidity of their recovery of the values of their homes resulted in an assessment that was much more closely aligned to the actual value of their homes.[11] Is this state sanctioned taxation that results in different treatment of black and white taxpayers? Yes. Is this fair and equitable? Certainly not.
As demonstrated above, a state’s assessment of property taxes, while facially neutral, can have an impact that affects citizens of different races unequally. Similarly, a state’s assessment of excise taxes can produce a disparate effect on minorities. Excise taxes are taxes on goods or specific activities.[12] Municipal corporations typically assess excise taxes on business in a certain industry by granting a license to conduct that activity within the taxing jurisdiction. As an example, the city of Seattle imposes excise taxes on businesses that profit from gambling; from providing utilities; and from the distribution of sweetened beverages.[13] Excise taxes are typically passed on by businesses to consumers in the prices of items subject to the tax.[14] This means that even if the tax is formally denominated as a tax on businesses, the customers of those businesses, in the final analysis, are the ones who end up paying the tax. States, pursuant to their taxing powers, are given great latitude when making classifications that are subject to excise tax (or any tax for that matter).[15] If a government does not create a tax classification based on a “inherently suspect characteristic” (like race), the Equal Protection Clause only requires that the classification “rationally further a legitimate state interest.”[16]
Because excise taxes are facially racially neutral (as taxes on business activities), they are not subject to any type of enhanced scrutiny by courts. This, I assert, is a major impediment to the full exercise of economic citizenship, because excise taxes can produce disparate impacts for minority citizens. Essentially, a government can assess an excise tax (which we know will be passed along to a consumer) on a particular line of business that is overwhelmingly patronized by citizens of a certain race. The net result of that excise tax would be a tax on a certain race of citizens — which is strictly prohibited by the Equal Protection Clause. The counterargument to this theory is that excise taxes only trickle down to those who pay for and consume the taxed product. This “consumption” argument, though, ignores the realities of life. If a consumer has used a product for their entire lives, simply because a government passed an excise tax on that product doesn’t mean that the person will rationally take this enhanced cost into consideration when deciding whether to continue using that product. The person will likely continue their activity and pay the racially inequitable tax. Say, as a hypothetical scenario, that a local government levied an excise tax on menthol cigarette distributors because science showed that menthol cigarette smokers were four times as likely to develop lung cancer than those who smoked regular cigarettes. In this scenario, also assume that 90% of menthol cigarettes were consumed by black smokers. Here, the government has made a classification that is rationally related to a legitimate state purpose: protecting public health. Facially, this excise tax is racially neutral. Upon a slightly deeper analysis, though, this tax disproportionately affects black smokers compared to smokers of other races. Because black smokers are likely to continue smoking menthol cigarettes, they end up paying more for their cigarettes than white smokers. Is this state sanctioned taxation that results in different treatment of similarly situated black and white taxpayers? Yes. Is this fair and equitable? Certainly not
To avoid scenarios like the one described in the menthol cigarette hypothetical above, I propose the importation of the disparate impact theory from the employment discrimination context to the taxing context. I contend that governments should voluntarily include a disparate impact analysis in their taxing decisions. If governments fail to voluntarily include disparate analysis considerations in their taxing process, I call on legislatures to provide a cause of action for taxpayers who believe the taxes they’ve paid have a disproportionately negative affect on members of a certain race. Normatively, state and local governments should be in the business of protecting racial minorities, like black Americans, from inequitable economic conditions — not imposing those conditions themselves. Racially neutral taxation is an important step in ensuring the economic rights of all citizens.
I envision a disparate impact cause of action for taxation like that found in the employment discrimination context. A typical employment disparate impact case has three stages.[17] In the first stage, the employee must prove that an employer’s seemingly neutral action has a disproportionate negative effect on a protected class (for our purposes, a racial minority). Once the plaintiff makes this showing, the defendant employer can defend itself by a showing that the action in question is job-related and necessary for the success of the business. If the employer makes this showing, the plaintiff employee can still win the case if it can show that reasonable alternative actions were available to the employer that would be less impactful on racial minorities, but the employer refused to take those actions. In the taxation context, I envision a similar “burden-shifting” framework.
· First, the taxpayer would have to prove that a taxing scheme (regardless of whether a tax is supposedly identified an excise tax on business) produces an actual disparate impact that results in members of a minority group paying the tax in question at a much higher rate than white taxpayers.
· Second, the government would then have to prove that the tax is narrowly tailored to achieve compelling state interest.[18]
· Third, if the government can make this showing, the tax would still be overturned if the taxpayer can prove that the government could have achieved its interest without levying the racially inequitable tax.
If you thought my menthol cigarette hypothetical scenario was far-fetched, let me assure you that it is not. That hypothetical is based loosely on the Seattle sweetened beverage tax that went into effect on Jan. 1, 2018.[19] This tax imposed an excise tax on the distribution of sweetened beverages (e.g. sodas and sports drinks) in the city.[20] The city council passed, and the mayor signed, this law knowing that it would disproportionately affect communities of color.[21] The city attempted to diminish this impact by using revenue from the tax to expand access to healthy and affordable food and to increase funding for early education.[22] Despite the noble goals for the revenue raised by the sweetened beverage tax, I still argue that this was still state-sponsored infringement of the economic rights of black citizens to be taxed fairly and equitably. Regardless of the tax’s form as an excise tax on business, it was, in reality, a tax primarily levied on the largest consumers of sweetened beverages — black Seattleites and other minorities. The carve out in the sweetened beverage ordinance for milk-based beverages (e.g. sweetened coffees) that cause the same types of health issues targeted by the taxation of sodas and sports drinks shows, at best, a logically inconsistent tax and, at worst, a premeditated design to collect excise tax revenue by targeting racial minority taxpayers (via intermediary businesses). This should be impermissible — as it infringes on the economic rights of black citizens to be taxed equally with their white peers. If the government wanted to improve access to healthy foods and early childhood education in minority communities, which are undoubtedly honorable pursuits, it should pay for those programs by assessing taxes that equitably burden all citizens — not just the citizens or communities receiving an indirect benefit from those services. It’s almost as if the city said, paternalistically, “we’re doing this for your benefit, and we’re going to make you pay for it!”
Had the Seattle sweetened beverage tax been run through a disparate impact analysis prior to passage, it’s unlikely that the tax would be enacted law today. Under my proposed framework outlined above, the mayor’s office would have concluded that the sweetened beverage tax, as proposed, would have created an impermissible and unlawful disparate impact on minority taxpayers. As an initial matter, the government would have concluded that the sweetened beverage tax would fall disproportionately on minority citizens. With this understanding, the government would need to be confident that its proposal was narrowly tailored to a compelling state interest. At this step, the legislation would have likely failed. If the government could prove that public health (obesity reduction) was a compelling state interest, which it arguably is, it is unlikely that it could show that this legislation was narrowly tailored to meet that goal. This ordinance exempted artificially sweetened beverages (diet drinks) and sweetened, milk-based beverages. These exemptions show that the selection of categories of beverages for inclusion in the tax was arbitrary. A showing that the beverages selected for inclusion in the tax happened to be beverages consumed heavily by minorities strongly militates against the notion that the sweetened beverage tax’s goal was a public health initiative. Even if the state felt confident that the tax was narrowly tailored, it would also face issues at step three of the analysis; the government would have a difficult time proving that its public health goals had to be accomplished by the levying of the sweetened beverage tax. Public health outreach, the improvement of the availability of healthy foods, and improvements in early childhood education could have been achieved through means other than an inequitable tax. The city could, for instance, apply for federal grants[23] and used that money to support local nonprofit organizations and charities that work to reduce obesity and improve early childhood educational outcomes.
In conclusion, state-sponsored infringement of economic citizenship rights through inequitable taxation is a serious issue facing black Americans (and other minorities) today. This article is meant to be a starting point for discussion. It is, by no means, exhaustive and infallible. The point of this article was merely to bring issues of racially inequitable taxation to the forefront. When thinking about racially inequitable taxes, I assert that the form of the tax shouldn’t matter. A tax is no less discriminatory because it is labeled as an indirect “excise” tax instead of a direct tax; whenever a tax’s implementation produces an actual disparate impact on a racial minority, that tax should be unlawful because it hinders a citizen’s economic rights. The disparate impact theory used to prove unlawful discrimination in employment law is a worthy starting point for discussing possible remedies for racially inequitable taxation. After all, in my opinion, economic rights are inextricably intertwined with civil rights. If our country is to live up to its ideals of equality, we must ensure that the state, itself, is not enforcing inequality through taxation.
[1] Richard Cordray, CFPB Director Richard Cordray’s Prepared Lecture on Economic Rights as Civil Rights at Michigan State University, Oct. 10, 2014 (https://www.consumerfinance.gov/about-us/newsroom/cfpb-director-richard-cordrays-prepared-lecture-on-economic-rights-as-civil-rights-at-michigan-state-university/).
[2] U.S. Const. amend. 14, clause 1. “All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.
[3] U.S. Citizenship, United States Citizenship and Immigration Services, https://www.uscis.gov/us-citizenship.
[4] Kim Soffen, How Racial Gerrymandering Deprives Black People of Political Power, Washington Post (Jun. 9, 2016), https://www.washingtonpost.com/news/wonk/wp/2016/06/09/how-a-widespread-practice-to-politically-empower-african-americans-might-actually-harm-them/
[5] Eric Schlosser, The Prison-Industrial Complex, The Atlantic (Dec. 1988), https://www.theatlantic.com/magazine/archive/1998/12/the-prison-industrial-complex/304669/
[6] Caroline Simon, There is a Stunning Gap Between the Number of White and Black Inmates in America’s Prisons, Business Insider (Jun. 16, 2016), http://www.businessinsider.com/study-finds-huge-racial-disparity-in-americas-prisons-2016-6
[7] James Forman, Jr., A Prison Sentence Ends. But the Stigma Doesn’t, N.Y. Times (Sept. 15, 2017), https://www.nytimes.com/2017/09/15/opinion/a-jail-sentence-ends-but-the-stigma-doesnt.html
[8] Shaping Employment Discrimination Law, Equal Employment Opportunity Comm’n, https://www.eeoc.gov/eeoc/history/35th/1965-71/shaping.html
[9] Economics of Taxation, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/faqs/Taxes/Pages/economics.aspx
[10] As an example, see the State of Washington Constitution, Art. 11 § 12. http://leg.wa.gov/lawsandagencyrules/documents/12-2010-wastateconstitution.pdf
[11] Richard Rothstein, Race Tax Harms African Americans, Econ. Policy Inst., http://www.epi.org/blog/race-tax-harms-african-americans/
[12] Excise Taxes, Tax Foundation, https://taxfoundation.org/individual-consumption-taxes/excise-taxes/
[13] Business and License Tax, City of Seattle, WA, https://www.seattle.gov/business-license-tax/other-seattle-taxes
[14] Excise Tax, Investopedia, https://www.investopedia.com/terms/e/excisetax.asp
[15] A Revenue Guide for Washington Cities and Towns, MSRC.org, http://mrsc.org/getmedia/d3f7f211-fc63-4b7a-b362-cb17993d5fe5/Revenue-Guide-For-Washington-Cities-And-Towns.pdf.aspx?ext=.pdf (page 23)
[16] Nordlinger v. Hahn, 505 U.S. 1 (1992), https://supreme.justia.com/cases/federal/us/505/1/case.html
[17] See Proving Discrimination — Disparate Impact, U.S. Dep’t of Justice, https://www.justice.gov/crt/fcs/T6Manual7.
[18] Note, this language mimics the strict scrutiny standard applied to questions of equal protection when the government makes a race-based classification. See Strict Scrutiny, Cornell Law School Legal Information Institute, https://www.law.cornell.edu/wex/strict_scrutiny
[19] Daniel Beekman, Prices Going Up for Sugary Drinks as Seattle Tax Kicks In, Seattle Times (Dec. 31, 2017), https://www.seattletimes.com/seattle-news/politics/promoting-health-at-a-hefty-price-seattles-soda-tax-starts-jan-1/
[20] Seattle, WA Municipal Code § 5.53 https://library.municode.com/wa/seattle/codes/municipal_code?nodeId=TIT5REFITA_SUBTITLE_IITA_CH5.53SWBETA_5.53.010ADPR.
[21] Sweetened Beverage Race Equity Toolkit, http://seattle.legistar.com/View.ashx?M=F&ID=5141761&GUID=8B32E4CA-89A4-4148-8B44-5535E418A0BA
[22] Seattle, WA Ordinance 125324 § 1, http://seattle.legistar.com/View.ashx?M=F&ID=5246235&GUID=FA389302-A085-4AC7-8AB1-60F41C4B4DD0
[23] See, e.g., What Kind of Grants are Available from the Federal Government, U.S. Dep’t of Health and Human Services, https://www.hhs.gov/answers/grants-and-contracts/what-kinds-of-federal-grants-are-available/index.html
