IRS data on racial disparities in the laws it administers remains conspicuously absent, but the effort to change that is starting to gain traction.
Researchers say the code could be more equitable if the IRS, Treasury Department, and Joint Committee on Taxation incorporated race into their data and analyses, something many other federal agencies already do. But collection of the data raises thorny questions of authority, privacy, and public perception that don’t yield easy answers.
The collection and analysis of race-based tax data would make it easier for lawmakers to see who is disproportionately benefiting from tax breaks or bearing the brunt of IRS enforcement, enabling them to craft more equitable legislation. Passing laws without that knowledge can widen gaps between people of different races and ethnic backgrounds, according to academics and researchers.
“If you’re equal to me and I’m equal to you, colorblindness is fine. But if there are built-in disparities and inequities, then colorblindness just solidifies that disparity,” said Wilton B. Hyman, a professor at New England Law in Boston who has authored articles on the intersection of tax and race. “So even though it seems fair, in a general sense, in a more substantive sense it’s basically creating a permanent disparity, a permanent bias, a permanent unfairness to that person who’s on the bottom.”
Plenty of other agencies collect racial demographic data. The Labor Department’s monthly jobs report, for instance, breaks down unemployment and other statistics by race. The Department of Housing and Urban Development has collected and reported data on housing discrimination, and the Justice Department has done the same with discrimination in policing.
There is evidence that certain tax code provisions result in vastly different outcomes for different racial groups, primarily due to differences in wealth. But researchers often have to rely on best estimates using incomplete data.
For example, tax-advantaged retirement accounts reward people with money to stow away, preferential treatment of long-term capital gains from assets like stocks and bonds benefits those who hold those assets, and mortgage interest deductions are helpful to homeowners.
“You could say the mortgage interest deduction is great for all families,” said Amy Matsui, senior counsel and director of income security at the National Women’s Law Center, who has studied this issue.
But the tax break has limited use for women and women of color in particular due to their lower income levels, though that is difficult to see without more precise data, Matsui said.
The JCT, a nonpartisan body that assists lawmakers with analyses and revenue estimates of legislative proposals, may be able to help Congress spot racial and demographic inequities. But the committee typically shies away from potentially controversial studies, absent significant pressure from lawmakers, a former JCT economist told Bloomberg Tax. The individual requested anonymity to freely talk about the committee’s thinking.
JCT typically relies on IRS data pulled from tax returns and other files that don’t request information on traits like race or gender.
To conduct analyses on race, JCT would have to link tax data from the IRS with race data from other sources like the Census Bureau. That might draw backlash from policymakers because individuals don’t consent to that happening when they file their returns, the former committee employee said.
The IRS has a limited ability to do some matching on its own. The agency under tax code Section 6103 can share tax data with other federal agencies for tax administration purposes, but Congress would have to act to broaden that ability, said Tom Petska, a former director of the IRS’s Statistics of Income division.
The IRS, at one point, contributed to a robust dataset matching information from the Census Bureau’s Current Population Survey with limited tax return data and Social Security earnings and benefits, Petska said.
“Back in the ‘70s I thought this is the future of federal statistics,” Petska said. “We’re going to have selective matches, we’re going to be sworn to confidentiality, and we’re going to have these rich datasets.”
But the Nixon administration’s attempted misuse of the IRS for political purposes killed a lot of the appetite for that type of work, he said.
What’s Needed for Compliance
One of the biggest barriers to incorporating race into IRS data is a longstanding belief among some in the government that the information is purely a tool for tax collection and administration, not for researchers to analyze inequality, according to several former officials.
But to enforce the 1964 Civil Rights Act, many federal agencies have to collect race and ethnicity data to ensure discrimination isn’t happening and to intervene if it is, noted Jeremy Bearer-Friend, an associate professor at George Washington University Law, who authored a paper on this issue.
The IRS has collected data on and combated segregation within its workforce, but hasn’t extended that to treatment of taxpayers, he found.
The lines of what is necessary to collect for taxpayer compliance are “already a bit fuzzy,” Bearer-Friend said. “You could make the case that it’s necessary to ask” taxpayers about their race, “and it actually is directly relevant to compliance because it’s necessary for them to monitor themselves to make sure they are adhering to nondiscrimination in how they administer the code.”
JCT declined to comment for this story. The IRS directed questions to Treasury. Treasury didn’t return requests for comment.
Privacy, Accuracy, Political Concerns
There is a risk that putting a race and ethnicity question on a tax return could lead to misuse, or create a perception of discrimination—even if the IRS isn’t auditing or taking collection action against taxpayers based on their race, said Mark Mazur, a former Treasury official who has also worked at the IRS and JCT.
Mazur said the general view during his time in the government was that race, gender, or religion shouldn’t be determinative factors or potential influences on tax administration decisions.
Such a question could also scare people away from filing, tax professionals said.
Undocumented immigrants in particular might fear filing if asked about their race, said Francine Lipman, a professor at the University of Nevada’s William S. Boyd School of Law in Las Vegas who assists low-income taxpayers.
Alternatives to adding a race question to tax returns—such as a separate survey or matching tax return data with data from other agencies—risk producing errors.
Census Bureau survey data is generally based on households and taxpayer data is not, and the bureau’s income measures can underestimate income disparities by leaving out capital gains, tax policy researchers said.
Some fear the data could be politicized in racist ways. But stereotypes about who benefits from government coffers and who contributes to them have been around for decades, and data could also help disprove those stereotypes, tax professionals said.
The structure of the Child Tax Credit, for instance, “leaves behind some of our lowest-income children of color,” because of the way the credit is phased in as earnings increase, said Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy, citing a 2019 report from the Columbia University Center on Poverty and Social Policy. ITEP, like other think tanks, has been analyzing racial disparities in tax policy.
Several lawmakers, amid a national conversation on systemic inequality, say they are working on legislation to address the government’s race-blind tax data.
Sen. Sherrod Brown (D-Ohio) hopes to introduce a bill to require additional reporting by the IRS—potentially in consultation with other agencies—on racial disparities within the tax system later this year, according to a spokesperson from his office. The Joint Committee on Taxation should play a role in that, the spokesperson said.
House Ways and Means Committee Chairman Richard Neal (D-Mass.) is also writing legislation aimed at requiring collection of taxpayer race data, a spokesperson said. Neal and Rep. Ayanna Pressley (D-Mass.) recently asked Treasury Secretary Steven Mnuchin to provide an analysis of racial disparities in tax policy and administration, including outcomes of recent Covid-19 stimulus measures. Spokespeople for both said they haven’t received a response.
“As our country focuses on identifying and eliminating systemic racism, we have a duty to ensure that our tax laws do not perpetuate racial injustice,” the lawmakers said.
—With assistance from Faris Bseiso.