Excerpted From: Ann F. Thomas, The Racial Wealth Gap and the Tax Benefits of Homeownership, 66 New York Law School Law Review 247 (2021/2022) (171 Footnotes) (Full Document)

AnnFThomasThe Black/white racial wealth gap in the United States is huge. It is persistent. And it has changed very little since the 1960s. In 2019, before the onset of the COVID-19 pandemic and some fifty-five years after landmark civil rights legislation intended to equalize access to housing, education, and employment, the net assets of the median Black family in America were less than 15 percent of the net assets of the median white family. The typical white family had median net assets of $188,200; for the typical Black family the median was $24,100. In other words, white families had almost eight times more net assets than Black families. The numbers are shocking.

That an enormous racial wealth gap exists at this time in our history flies in the face of the progress-toward-racial-equality narrative that holds our national psyche so firmly in its grip. Although now more widely discussed in the popular press, academic scholarship, and across the internet, misconceptions about the dimensions and the causation of racial economic inequality abound. As an entry point for discussion of this urgent problem, this article presents an explication of one of the societal structures, colorblind on its face, that has contributed to America's racial wealth gap--the slate of income tax benefits conferred on homeownership.

Over the past 109 years of the modern federal income tax, wealth-building tax benefits for homeowners, especially the exclusion of imputed rental income from owner-occupied housing, have been enormous. Since the 1970s, the homeownership rate for white American families has been at about 72 percent. For Black American families the homeownership rate has been barely above 40 percent. In other words, more than 70 percent of white families can benefit from these wealth-building tax breaks while almost 60 percent of Black families cannot. Faced with these facts, it is difficult not to conclude that the tax benefits of homeownership have become racialized.

Part II of this article examines the racial wealth gap and the intertwined racial homeownership gap. Part III provides an introduction to the long tradition of federal income tax benefits relating to homeownership and the tax expenditure budget quantification of this investment of national resources. It then examines eight tax benefits of homeownership that collectively compound the racial wealth gap. Part IV reviews the three prerequisites for purchasing a home and the structural inequities that both historically and currently make them barriers to Black American homeownership and, consequently, limit the opportunities for Black families to amass generational wealth. Part V concludes this article with a proposed method for reducing the inequalities fostered by the tax subsidies currently reserved for homeowners.

The racial wealth gap stands in the way of the racial equality and the multiracial democracy to which we as a nation claim to aspire. It is also a drag on the national economy. If we are to solve this problem, we need to name it and understand it.

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Racial discrimination was not introduced into American life by the federal income tax. Nor did it create the institutional racism that one can see at work in the racial homeownership gap. But it is essential to recognize that through tax benefits for homeowners, for generations the federal income tax has contributed to the racial wealth gap. If this is so, what is to be done?

Some of the tax subsidies for homeownership are much criticized, and rightly so, for favoring the wealthy, driving up residential real estate prices, encouraging overinvestment in owner-occupied housing, and contributing to overall economic and racial inequality. Proposals for reform range from turning the HMID and real property tax deduction into a tax credit, or even a refundable tax credit, to allowing deductions when homes sell at a loss, to outright repeal of all the tax preferences for homeownership. Although still political hot buttons, proposals to repeal the HMID and real property tax deduction are not as improbable as they once were, now that taxpayers are being weaned away from claiming itemized deductions by the 2017 TCJA's near doubling of the standard deduction.

But even repealing the HMID, real property tax deduction, exclusion of gains on sale of the principal residence, and step up in basis on the homeowner's death would still leave the largest tax expenditure for homeowners in place: the exclusion of imputed rental income. Taxing imputed rental income is probably not feasible in the United States today for practical and political reasons any more than it was in 1864. If the HMID is aptly called the political third rail in tax policy, trying to tax imputed rental income must be a nuclear weapon. Yet there is another way to level the playing field: a residential renter's tax credit.

A residential renter's tax credit would put renting and owning on a more equitable footing. It would end the shifting of the tax burden from owners to renters that the exclusion of imputed rental income now produces. In a “rough justice” way, it would contribute to wealth formation for renters as the exclusion of imputed rental income now does for owner-occupied housing. What impact a renter's tax credit would have on the racial homeownership gap is not clear; it could change preferences for homeownership all around. But it could contribute meaningfully to at least narrowing the racial wealth gap. Likewise, how such a tax credit should be designed--as a refundable credit, with or without a cap, whether phased in or immediate--requires further work. It would also be important to understand the impact it would have on the residential housing market overall. The Civil War income tax system does provide a precedent for this solution and there may be useful lessons to learn from that experience.

A residential renter's tax credit would go a long way to mitigating what Seligman described as the manifest injustice of leaving imputed rental income untaxed, namely, its contributions to the racial wealth gap across generations. Reform of this kind will not undo the harm that the racial wealth gap has caused Black families, and indeed, our entire nation. But it could stop the damage going forward. A residential renter's tax credit is worth exploring.

The impediments to racial equality hide in plain sight in our society, embedded in some surprising places. The federal income tax is one such place. Although concepts such as “taxation” and “structural racism” may not generally spring to mind in the same thought, examined in the context of social and economic reality such as barriers to homeownership for Black Americans, the IRC emerges as a sturdy source of inequality, generation after generation reliably contributing to racial disparities in wealth and poverty, well-being and economic fragility. Colorblind on its face but not in its impact, the IRC has fueled the racial wealth gap for many decades. It is time to change the story.

Otto L. Walter Distinguished Professor of Tax Law and Director, Graduate Tax Program, New York Law School. J.D. Yale Law School, 1976; A.B. magna cum laude Harvard-Radcliffe, 1973.