Ann F. Thomas (New York Law School), The Racial Wealth Gap and the Tax Benefits of Homeownership, 66 N.Y. L. Sch. L. Rev. 247 (2021-2022):
Conclusion: Can Tax Reform Make A Difference?
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.