Crawford & Gerzog: Tax Benefits, Higher Education, And Race

Bridget J. Crawford (Pace) & Wendy C. Gerzog (Baltimore), Tax Benefits, Higher Education and Race: A Gift Tax Proposal for Direct Tuition Payments:

A tax system should be fair. According to conventional wisdom, this fairness mandate means that similarly situated taxpayers should pay similar taxes. Notably absent from most discussions about tax fairness is any consideration of race. This makes sense, if one focuses on the tax laws’ facial neutrality, as well as the Internal Revenue Service’s failure to collect official data about the race of taxpayers. But if one is interested in the “fairness,” as the word is commonly understood, of the tax law in action, then race and other identity characteristics must inform any analysis. This Article intervenes in the discussion of tax fairness with three principal claims: one descriptive, one normative, and one utilitarian.

First, the Article uses data from the higher education sector to demonstrate that primarily wealthy, white taxpayers capture the most generous educational tax benefits for higher education. Black taxpayers appear to benefit the least from these tax provisions. Black college graduates have greater education-related debt (both in incidence and quantum) than any other group of their peers. Furthermore Black college graduates have lower average wages and higher rates of unemployment compared to their Asian, Hispanic/Latinx counterparts. Black families are the least likely to be able to contribute to a 529 college tuition savings program or make tax-free, direct tuition payments. While Black college graduates and families can take advantage of some tax benefits for higher education, the greatest tax expenditures are for those that benefit whites.

The Article next argues that achieving a more racially just society requires attention to the ways that tax laws exacerbate existing race-based economic inequality. If one understand the tax system to both reflect and create a nation’s values, then moving toward racial justice will require an expanded definition of tax “fairness.” This Article uses the example of the gift tax exemption for direct tuition payments to illustrate the ways that tax rules can exacerbate the racial wealth gap. In the context of higher education and beyond, there are abundant opportunities for future research at the intersection of race and taxation. That work is made more difficult by the absence of readily available tax data on the basis of race, but other data sources can help fill the gaps.

Finally, the Article proposes a test for evaluating the fairness of any tax exclusion or deduction. In the case of the wealth transfer tax, a particular tax benefit is inequitable if (1) it has disparate impacts on the basis of race and (2) the benefit is inconsistent with the overall policy objective of taxing gratuitous transfers that create substantial wealth in another while depleting the transferor’s estate. The gift tax exemption for direct tuition payments fails both parts of this test and should be repealed.