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Anti-Racist State Budgets: Progressive Revenue
March 2021
Contents
Introduction
Policy Considerations
Progressive Income Taxes
Wealth (Net Worth) Taxes
Capital Gains Taxes
Excessive Executive Compensation Tax
Estate Tax
Inheritance Tax
Raising Progressive Municipal Revenue
Additional Resources

This primer is part of a series on anti-racist state budgets. To understand the concept of creating anti-racist state budgets, it is important to understand the difference between racist and anti-racist ideas and policies. The following excerpts are from How To Be An Antiracist (2019) by Ibram X. Kendi: 


Racist vs. Anti-racist Ideas

A racist idea is any idea that suggests one racial group is inferior or superior to another racial group in any way. Racist ideas argue that the inferiorities and superiorities of racial groups explain racial inequities in society. . . An antiracist idea is any idea that suggests the racial groups are equals in all their apparent differences – that there is nothing right or wrong with any racial group. Antiracist ideas argue that racist policies are the cause of racial inequities.

Racist vs. Anti-racist Policies

A racist policy is any measure that produces or sustains racial inequity between racial groups. An antiracist policy is any measure that produces or sustains racial equity between racial groups. . . There is no such thing as a nonracist or race-neutral policy. Every policy in every institution in every community in every nation is producing or sustaining either racial inequity or equity between racial groups. 

For additional race-equity concepts and definitions, please visit the Racial Equity Tools glossary webpage.


Introduction

We all benefit from funding for education, health care, infrastructure, and other vital services regardless of race, gender, or income level. But the wealthy few who rig the rules have created regressive state tax systems that too often exacerbate income inequality across both race and income. It doesn’t need to be this way; together we can rewrite tax codes to benefit us all. We’ve done this before, so we know that progressive revenue can stimulate economic growth, reduce income inequality, and narrow the gaps in income and wealth created through centuries of racism and discrimination.

Line chart shows the share of net worth of all u. S. Households from 1989-2019. In 2019, white americans held 85. 5% of the country’s net worth; black americans, held 4. 2%. (data source: https://www. Vox. Com/2020/6/17/21284527/systemic-racism-black-americans-9-charts-explained)

Tax codes that levy higher taxes on low- and middle-income families worsen income inequality and widen the racial wealth gap. Tax structures in 45 states exacerbate income inequality—in the 10 most regressive states, families at the bottom 20% of the income distribution pay up to six times as much in taxes as the state’s wealthiest families. While the investments made possible by taxes are a powerful force in combatting racial inequities, the way those taxes are collected, and from whom, remains deeply inequitable. Regressive state tax policies have deep and lasting roots in anti-Blackness, and in tandem with discriminatory and exploitative policies that embedded racism across all social and economic systems, state tax policy is not meaningfully addressing the growing racial wealth gap; and in many states actually expands it. As of 2016, Black and Latinx families had a median net worth of $17,600 and $20,700, respectively, compared to $171,000 for white families.

Strong communities and thriving families are built upon a foundation of public investments that benefit us all. Investments in good schools, affordable health care, and transportation infrastructure pay off for everyone. Research shows that higher levels of income inequality create a drag on economic and state tax revenue growth. States with fairer tax codes enjoy faster economic growth, faster income growth, and increased employment levels than states that are reliant on regressive taxes like sales and excise taxes.

Under a lopsided tax code, a state’s poorest families are paying the most in taxes, while also bearing the brunt of disinvestment when tax revenues decline. During the Great Recession, states slashed education and health care budgets in the face of revenue shortfalls, with lasting consequences for low-income Black, brown, and white communities. Years of public disinvestment have left the same communities less prepared to weather the COVID-19 public health crisis, and vulnerable to future budget cuts as states again grapple with severe budget shortfalls.

Policy Considerations

Policymakers have the power to generate needed revenue by revamping their existing state’s tax codes. They can implement innovative approaches that build a more equitable future and center the needs of communities of color and low-income communities. When considering ways to promote racial equity and reduce wealth inequality in state tax systems, state legislators should refer to the following recommendations and work with national and local advocates, especially those groups that center race equity, to develop the best policies for their state.

Group of diverse students at daycare or classroom

Progressive Income Taxes

To reduce income inequality and close the racial wealth gap, state personal income tax systems can be designed to ensure that the wealthiest pay their fair share. Currently, states such as California, Minnesota, New Jersey, and Vermont have highly progressive income tax brackets and graduated-rate tax structures that allow them to tax different income at different rates. In addition, there are a total of eight states (CA, CT, HI, MD, MN, NJ, NY, and OR) and D.C. that have enacted long-lasting millionaires’ taxes since 2000. See here for more information about the income tax rates at the top for these states. 

The New Jersey legislature passed 2020 NJ AB 10/Chapter 94, which increases the gross income tax rate from 8.97% to 10.75% on income between $1,000,000 and $5,000,000 (this is already the rate for income over $5M), and provides an annual rebate of as much as $500 for families making less than $150,000. The graduated income tax structure ensures the most affluent individuals, who are mostly white, pay a greater percentage of their income in taxes than their lower- and middle-income counterparts. 

There are still 18 states, including Illinois, that either impose a flat income tax or do not collect income tax at all. In 2020, Illinois voters failed to pass a ballot initiative regarding a graduated income tax amendment, which would have raised approximately $1.4 billion for the rest of the budget year and $3.4 billion over a full 12 months. The amendment would have repealed the state’s constitutional requirement that the personal income tax be a flat rate and instead allow for a graduated income tax. 

Arizona voters approved a 2020 ballot initiative, Proposition 208, to enact a 3.5% income tax, in addition to the existing income tax (4.5% in 2020), on income above $250,000 (single filing) or $500,000 (joint filing). This initiative has been challenged in court by a right-wing advocacy group with ties to the Koch Brothers. If the new law survives court challenges, it will provide additional tax revenue to support teacher and classroom support staff salaries, teacher mentoring and retention programs, and career and technical education programs.

Wealth (Net Worth) Taxes

While progressive income taxes raise revenue from the income reported on one’s personal income tax return, wealth taxes target the net worth—total assets net of all debts—of a household above an exemption threshold. Net worth includes financial and non-financial assets such as bank accounts, bonds, stocks, luxury goods, and real estate. Taxes on net worth are critical for capturing revenue from the most affluent members of society who possess substantial wealth but may have comparatively lower incomes.

It is possible for the wealthiest households to have low taxable income because our tax codes have been designed to allow them to escape taxation in different ways. For example, the tax code does not consider income from unrealized capital gains as “taxable income” and thus, much of one’s income would not appear on their annual tax returns. As of 2021, eight states do not have an income tax and would therefore not be able to tax even realized capital gains. See Center on Budget and Policy Priorities’ report on the issue of special tax breaks for the wealthy for more information.  

California took the lead by introducing a first-of-its-kind state wealth tax (2020 CA AB 2088) that would have applied a 0.4% rate to net worth, excluding real estate, in excess of $30 million per household. 

Legislation in Washington (2021 WA HB 1406) would have assessed a modest 1% tax on “financial intangible assets, such as publicly traded options, futures contracts, and stocks and bonds” on wealth in excess of $1 billion (i.e., the first $1B is exempt from the wealth tax).

This myth refers to the idea that taxing the wealthiest individuals will encourage them to leave and migrate to other states with lower taxes. Anti-tax advocates and politicians often use this myth to advocate for more tax cuts and regressive tax systems. However, the people who tend to move most frequently are not the rich, but instead are typically young college graduates and the lowest income residents who earn below-market incomes and want a better quality of life. While a very small number of wealthy households may leave as a result of tax increases, migration rates for higher-income earners are low. Read more about the myth and non-tax factors in migration decisions here. 

Black and brown families wait to cross the street at the light in the bronx, new york

Capital Gains Taxes

States should also consider strengthening their taxes on capital gains—the profits an investor realizes when selling an asset that has grown in value, such as shares of stock, mutual funds, or real estate investments. The Brookings Institution has a resource on capital gains reforms that discusses the current state of capital gains taxes on a federal level and different ways policymakers can use such taxes as a progressive source of revenue. 

While some states levy a tax on income and capital gains at the same rate, there are a number of other states that provide the wealthiest households with special tax preferences for their capital gains by taxing long-term capital gains at a lower rate than income. These special tax breaks and preferences prioritize investors’ capital gains income at the expense of the wages and salaries earned by working families and lower-income households of color. 

In Vermont, the legislature passed a bill (2019 VT HB 541) that limits the amount of long-term capital gains a taxpayer can exclude from taxable income to $350,000. Prior to the bill’s passing, Vermont had historically allowed income taxpayers to exclude up to 40% of their capital gains from their taxable income, regardless of the total amount. 

Similarly, New Mexico legislature (2019 NM HB 6 / Section 14) enacted a tax and budget plan that scaled back a tax break for the wealthiest New Mexicans by reducing the portion of capital gains that are exempt from taxation from 50% to 40%. While the 10% deduction is a step in the right direction, the 40% exemption still serves as a large and unnecessary tax break to the highest-income earners—the individuals who already pay the smallest share of their income in state and local taxes. Thus, it is more equitable for states to not just scale back, but eliminate preferences for capital gains income. 

Not only will repealing tax preferences increase revenue for critical public services, but so will creating new surcharges on capital gains. Connecticut lawmakers (2019 CT HB 7415) considered a proposal to levy a 2% surcharge on the capital gains amassed by the wealthiest taxpayers with incomes over $500,000 (for individual filers) and $1 million (for married joint filers). Minnesota (2019 MN HF 2125) also introduced legislation that would have increased the state’s top marginal capital gains tax rate from 9.85% to 12.85%, the second-highest in the country after California (13.3%). 

In addition, New York legislators (2020 NY SB 8277) proposed a billionaire “mark-to-market” tax on residents with $1 billion or more in net assets that would treat billionaires’ unrealized capital gains as income. It would have directed revenues from such a tax into a worker bailout fund to assist workers traditionally excluded from employment protection programs by providing them access to unemployment benefits.  

In Washington, Governor Inslee proposed a capital gains tax on the sale of stocks, bonds, and other assets to increase the share of state taxes paid by Washington’s wealthiest taxpayers. The state would apply a 9% tax to capital gains earnings above $250,000 for individuals and $500,000 for joint filers. Legislation to implement this tax was introduced in 2021 (2021 WA SB 5096).

Legislation has been introduced to close the carried interest loophole. Legislation in Maryland (2021 MD SB 288/HB 215) would have imposed a 17% state income tax on the share general partners receive of a pass-through entity’s taxable income that is attributable to investment management services provided in the state. Similarly, bills in Oregon address the carried interest loophole: 2021 OR SB 479 and 2021 OR SB 482 would impose an additional 19.6% state tax on investment services partnership income, which is currently taxed at the lower net capital gains tax rate.

Investment funds—such as private equity and hedge funds—are often organized as partnerships. These partnerships typically have two types of partners: general partners and limited partners. General partners manage the fund, while limited partners typically only contribute capital to the partnership. General partners can receive two types of compensation: a management fee tied to a percentage of the fund’s assets and a profit share; or “carried interest,” tied to a percentage of the profits generated by the fund. In a common compensation agreement, general partners receive a management fee equal to 2% of the invested assets plus a 20% share in profits as carried interest. 

The management fee, less the fund’s expenses, is subject to ordinary federal and state income tax rates (the top federal income tax rate for individuals in 2020 is 37%) and the federal self-employment tax. However, taxation of the carried interest is deferred until profits are realized on the fund’s underlying assets, when at such time, the carried interest is taxed [the same] as investment income received by the limited partners. Thus, if the investment income consists solely of capital gains, the carried interest is taxed only when those gains are realized and at a lower capital gains rate on the federal level (the top capital gains tax rate in 2020 is 20%, plus a 3.8% net investment income tax). 

(Source: Fiscal and Policy Note for 2021 MD SB 288)

Excessive Executive Compensation Tax

In addition to a lack of progressive taxes, another contributing factor to the rise in income inequality is the excessive pay for chief executive officers (CEOs). Rather than raising the wages for their workers, corporations are increasing the wealth of their CEOs who make hundreds—sometimes thousands—of times more than their employees. See this resource for more information on the implications of excessive executive pay. Policymakers can work to address corporate greed and fight for wealth equity by closing the CEO-worker pay gap through an excessive executive compensation tax. 

The Portland, Oregon, City Council was the first in the country to enact a measure that levies a tax on companies whose CEOs earned more than 100 times the median pay of their average workers. Corporate income tax increases by 10% if a company’s CEO has a salary ratio of above 100:1, and by 25% for companies with pay gaps equal to or exceeding 250:1. This tax generates revenue for the city’s General Fund, which pays for essential city services.

The Washington legislature (2019 WA HB 1681) introduced a bill that would have imposed a surcharge, in addition to business and occupation taxes and public utility taxes, on corporations with excessive chief executive officer pay. Similar to Portland, Oregon’s law, this legislation would have targeted companies with chief executives who were paid more than 50 times the pay of the average worker of that company. The revenue from this surcharge would have provided funding for the state’s earned income tax credit (EITC), a tax credit that puts money back into the pockets of working families with low to moderate incomes. The legislature also introduced a second bill (2019 WA SB 6017) that would have imposed an excise tax on annual compensation in excess of $1 million, with a tax rate between 5% and 10% depending on the compensation amount. 

Other lawmakers in California, Connecticut, Illinois, Massachusetts, Minnesota, New York, and Rhode Islandhave also introduced similar bills. This guide includes a list of federal, state, and local legislative proposals related to CEO-worker pay ratios, along with general resources on this topic.

Asian toddler playing on laptop with mother

Estate Tax

Another way states can tax wealth is through an estate tax, which is levied on the estate (money and property) of the most affluent individuals who have passed away. While there is a federal estate tax on estates valued over $11.7 million (as of 2021), only 12 states and the District of Columbia have their own estate tax. More states have considered implementing this extremely progressive tax because it helps to prevent the growth of “dynastic wealth” by directly targeting the intergenerational transfer of wealth and addressing the racial wealth gap. In 2016, 9 out of 10 households with assets above the federal estate tax threshold of $5.5 million were white.

Washington has a 20% estate tax (WA Stat. § 83.100.040), which is one of the highest rates in the nation, and Washington is the only state without an income tax that levies an estate tax. The Hawaii legislature (2019 SB 1361) also increased its top estate tax rate to 20%, which became effective at the start of 2020. For estates over $10 million, the tax is now $1,385,000 plus 20% of the amount the net taxable estate exceeds $10 million. 

Maine (2019 ME LD 420/HP 329) legislators introduced a bill that would have increased their state’s estate tax by lowering the exclusion amount for an inheritance from $5.6 million to $2 million.

Inheritance Tax

While an estate tax is a levy on one’s estate, an inheritance tax is levied on those who inherit money or property of a person who has died. Inheritances are a major contributor to growing wealth inequality and disparities between white households and households of color. One reason white families hold more wealth is they are considerably more likely to receive an inheritance, a gift, or additional family support. Specifically, nearly 30% of white families report having received an inheritance or gift, compared to about 10% of Black families, 7% of Hispanic families, and 18% of other families. More robust taxation of inherited wealth not only reduces the transfer of concentrated wealth from one generation to the next, but it also serves as a progressive source of revenue for critical services that we all depend on. 

At least six states impose inheritance taxes. Of these states, Nebraska (NE Stat. 77.2004, 77.2005, and 77.2006) has the highest top rate at 18%. The state’s inheritance tax is imposed on all property inherited from the estate of the deceased. The value of such property is based on the fair market value as of the date of death, and the amount of the tax depends upon the recipient’s relationship to the deceased. The surviving spouse pays no inheritance tax, children and other close relatives pay a maximum 1% tax, and more distant relatives pay a maximum 13% tax. In all other cases, the rate of tax is 18% on the clear market value of the beneficial interests in excess of $10,000.

The following states also levy a tax on inheritance. See below for details on their tax rates: 

Raising Progressive Municipal Revenue

While legislatures have the power to reform their state’s tax codes, they also have the ability to increase municipal revenue through progressive strategies. However, there are states that limit municipal powers from implementing progressive taxation structures. For example, some states have statutory and constitutional limits on the amount of property taxes that can be levied at the local level. As property tax revenues often support locally provided public services and amenities, state limitations on such taxes prohibit local governments from fully investing in such services. As a result, municipalities are forced to reckon with deep spending cuts, resulting in severe consequences for and decreasing the quality of life of their residents. 

Income inequality is an issue that significantly affects communities on not only a national and state level, but on a local and regional scale as well. In order to effectively address disparities in wealth, state policymakers can consider legislation to promote progressive tax structures within municipalities, including repealing any state preemption of local revenue-raising authority. See Local Progress’s 2015 report for more information about the major obstacles of raising municipal revenue, along with policy recommendations for cities, regions, and states to make local tax collections more progressive. 

Mother nursing baby while toddler jumps on bed

Additional Resources

Americans Seeking Further Economic Relief Amidst COVID-19 Pandemic – Groundwork Collaborative and the Roosevelt Institute

  • Voters are supportive of federal relief efforts. 88% of voters agree that the paid sick and caregiver leave provided through the CARES Act was effective. 87% agree that increased unemployment benefits are effective.
  • Voters believe that much more relief is needed. 56% of voters believe Congress has not gone far enough to address the pandemic recession. 70% agree that we should do whatever it takes to provide Americans the economic support they need during this very difficult time.
  • Voters want Congress to put people first. 74% of voters believe that Congress should prioritize helping people and workers. Other priorities include health care, housing protections, food assistance, and worker protections.
  • Voters want bold, long-term relief measures. 71% of voters support major, sweeping action over modest action. 62% agree that future responses should address the underlying issues of inequality and poverty that made the economy more vulnerable in the pandemic.

The Need for a True Wealth Tax to Support Those Most in Need Due to the Coronavirus – Data for Progress and the Justice Collaborative Institute

  • Voters support a wealth tax on the richest 5% of Americans. 66% of voters support a one-time, 5% wealth tax on the richest 5%. 60% of voters agree that essential workers are doing their fair share, and that wealthy Americans must do the same with a wealth tax.

Economy Poll – Reuters/Ipsos

  • Voters support a wealth tax on the richest Americans. 64% of voters agree that the very rich should contribute an extra share of their total wealth each year to support public programs. Only 33% of voters believe that the very rich should be allowed to keep wealth that increases inequality.

January Tracker Poll – GSG, GBAO, and Navigator

  • Voters oppose cuts to public programs. 62% of voters oppose scaling back programs like Social Security and food stamps to reduce the national debt.
  • Voters support raising taxes on the wealthiest Americans. 64% of voters support raising taxes significantly on the top 1% of Americans.

Voters Support the Thrive Agenda – Data for Progress

  • Voters support strong public investments. 66% of voters support reinvesting in public institutions that serve all Americans.

Voters in Key States Support a Wealth Tax – Data for Progress

  • Voters support increasing taxes on the wealthy, and express even stronger support for wealth taxes as a means to fund infrastructure investments. 56% of voters support the creation of a 2% wealth tax on those with a net worth of over $50 million. When framed as a funding mechanism for infrastructure investments, 74% of voters support a wealth tax, 65% support a surtax on income over $200,000, and 63% support a real corporate profits tax.

Small Businesses Want to See Presidential Tax Returns – Businesses for Responsible Tax Reform

  • 64% of small business owners support increasing taxes on the wealthy.
  • 65% of small business owners do not believe that corporations pay their fair share of taxes, and 66% support increasing taxes on corporations.

ALG Research for Tax March/ATF

  • 75% of voters support raising taxes on the rich. Voters also ranked “making the rich pay their fair share in taxes” as their third-highest priority, after health care affordability and protecting Medicare and Social Security from budget cuts.
  • 68% of voters support raising taxes on multimillionaires by taxing income in excess of $10 million at a 70% rate.

PBS NewsHour/Marist

  • 62% of voters support a wealth tax on income over $1 million.

New York Times/SurveyMonkey

  • 67% of voters support raising taxes on Americans making $400,000 or more and keeping tax rates at current levels for those earning less than $400,000.

Financial Times/Peterson Foundation

  • 89% of voters support reducing the deficit by closing tax loopholes.
  • 71% of voters support raising the corporate income tax rate.
  • 80% of voters support raising taxes on higher-income earners.

Massachusetts – WBUR (May 2018)

  • 77% of voters support a millionaire’s tax to levy a 4% surtax on income in excess of $1 million.
  • 67% of voters support a reduction in the regressive sales tax, from 6.25% to 5%.

New Jersey – Rutgers/Eagleton/FDU (April 2019)

  • 72% of voters support raising taxes on households making more than $1 million annually.

Illinois – Paul Simon Public Policy Institute at Southern Illinois University (February 2020)

  • 68% of voters support a millionaire’s tax to levy a 3% surcharge on annual incomes of $1 million or more.
  • 65% of voters support a graduated income tax structure.

New York – Hart Research (January 2020)

  • 93% of voters support a new tax on luxury homes and apartments that are not a family’s primary residence and worth more than $5 million.
  • 92% of voters support a billionaire’s tax, including 66% in strong support, to apply a 2% tax on wealth in excess of $1 billion.
  • 90% of voters support raising the state income tax rate on income over $5 million per year.
  • 87% of voters believe that billionaires, and 81% believe that those with incomes over $5 million, should pay more in state and local taxes.
  • Voters overwhelmingly support increased taxes on the wealthy to address the state’s budget shortfall, while strongly rejecting cuts to essential services. To address the state’s budget shortfall:
    • 91% of voters support raising taxes on billionaires.
    • 90% of voters support raising taxes on incomes greater than $5 million.
    • 66% of voters oppose reducing funding for state colleges and universities.
    • 75% of voters oppose reducing funding for local cities and towns.
    • 80% of voters oppose reducing funding for roads, bridges, and transportation.
    • 81% of voters oppose reducing funding for K-12 education.
    • 81% of voters oppose reducing funding for health care for low-income families and seniors.
    • 85% of voters oppose reducing funding for services for the elderly or disabled.
  • Voters understand that raising taxes on the wealthy is good for all of us. 64% of voters believe that increased wealth taxes will have a good impact on the economy. 62% of voters believe that it will have a good impact on public education, 61% of voters believe that it will have a good impact on public services, and 60% believe that it will have a good impact on access to health care and long-term care.

Arizona, Colorado, Georgia, Iowa, Kansas, Kentucky, Maine, Michigan, Mississippi, North Carolina, and Texas – Data for Progress (September 2020)

  • 61% of voters across 11 battleground states are more likely to vote for a candidate who supports a wealth tax. Support was even higher in Maine (69%), Iowa (69%), Arizona (64%), and North Carolina (62%).
  • 62% of voters across 11 battleground states support a 2% wealth tax on individuals with a net worth of over $50 million. Support was even higher in Maine (68%), Colorado (68%), Kansas (65%), Michigan (64%), and Iowa (64%).

Wisconsin – Public Policy Polling (July 2019)

  • 79% of voters support raising taxes on the wealthiest Americans.
  • 71% of voters agree that the rich can afford to pay more in taxes, and 66% say that the rich do not currently pay their fair share. 54% of voters consider making the rich pay their fair share to be a very important issue.
  • 80% of voters support raising taxes on households with over $10 million in wealth.
  • 69% of voters agree that the rich take advantage of tax loopholes, leaving the rest of us to pick up the tab, even as they’ve gotten richer.
  • 66% of voters support raising taxes on the rich to protect important government programs like Medicare, Medicaid, and Social Security.

Florida – Public Policy Polling (June 2019)

  • 72% of voters support raising taxes on the richest 5% of Americans, including 58% in strong support. 
  • 62% of voters believe that the rich do not pay their fair share of taxes. 65% agree that the rich take advantage of many tax loopholes, leaving the rest of us to pick up the tab, even as they’ve gotten richer.
  • 63% of voters support raising taxes on the rich to protect important government programs like Medicare, Medicaid, and Social Security.
  • 70% of voters support raising taxes on households with over $10 million in wealth.

Pennsylvania – GSG (May 2020)

  • 74% of voters support eliminating tax breaks for corporations and large businesses that don’t offer paid sick and family leave and health care to their employees.
  • 55% of voters support eliminating tax breaks for large corporations as a response to the coronavirus pandemic.
  • 68% of voters agree that large corporations have gotten government tax breaks for years during the economic boom and believe they don’t need taxpayer dollars from the state government because they are best positioned to weather this crisis without government support.
  • 65% of voters agree that corporations have gotten government handouts and tax loopholes for years, and that the government should eliminate those loopholes and make big corporations pay their fair share so we aren’t forced to cut funding for essential services like schools, health care, and public safety.

Contents
Introduction
Policy Considerations
Progressive Income Taxes
Wealth (Net Worth) Taxes
Capital Gains Taxes
Excessive Executive Compensation Tax
Estate Tax
Inheritance Tax
Raising Progressive Municipal Revenue
Additional Resources

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