The unequal property tax burden on Black and Latinx households

By Carrie B. Reyes | Jul 27, 2020 | Feature Articles, Tax | 15

This article examines the unequal property taxes paid by Black and Latinx homeowners and the implications for homeownership rates in California.

Everyone pays taxes, but how much? Nationally, the average Black household has a 13% higher property tax burden than the average White household. That’s mainly due to the unbalanced assessed values of homes in non-White neighborhoods. Homes in Black and Latinx neighborhoods have 10% higher values for tax assessment purposes relative to the actual sales price, according to a study by researchers from the University of Utah and Indiana University, as reported by the Washington Post. Why do Black and Latinx households pay higher property taxes? According to the study, two reasons stand out:

with more generational experience in both owning homes and successfully challenging legal systems, White households are more likely to appeal their assigned property taxes; and
higher tax rates have been used by local governments to push long-term residents out of gentrifying neighborhoods.

However, this national assessment excludes California due to the wonky tax rates produced by Proposition (Prop) 13. More on that below.

The situation The Washington Post examines America’s deep-seated conviction, countered by sociologist W.E.B. Du Bois over a century ago, that White people are “makers” and Black people are “takers,” receiving more in public services than they contribute. But this is objectively untrue, as research shows Black residents pay higher effective tax rates than White residents — including property taxes and regressive taxes.

Generally, the bigger your paycheck, the more taxes you pay. However, the rate of taxes varies based on what type of income and what type of payments are being made. For example, capital gains are taxed at 20% for the highest income bracket, compared to a maximum 37% tax rate for regularly earned income for this bracket. A capital gain is the profit realized from the sale of an asset or other investment, like a home sale. On top of this limit, the principal residence profit exclusion allows qualifying homeowners to exclude the first $250,000 — or $500,000 for joint filers — from the sale of their personal residence. Any additional profit is taxed at the lower capital gains rate. [26 United States Code §121(b)]

Further, owners of investment property have the option to re-invest profit from the sale of property into like-kind property. This is called a §1031 exchange and it allows an investor to defer their taxes owed on the sale of their investment property. [Internal Revenue Code §1031] This system favors households who already own property with lower tax rates, despite the likelihood of six-figure gains on many of these transactions. On the other hand, households that do not own property don’t have access to these tax savings, thus all of their income is taxed at the higher income tax rates.

Similarly, regressive taxes are taxes that favor high-income earners by imposing a higher burden on low-income earners. For example, a high-income earner pays the same sales tax as a low-income earner, despite the fact that they earn more money and thus have more available to spend, save and invest. This means the low-income earner ends up spending a higher percentage of their income on things like sales taxes than high-income earners. Over generations, this unequal tax burden allows wealth to build for those able to access the tax benefits, while leaving others behind. Related article: Prop 13 just makes things worse Here in California, we also need to consider the impacts of Prop 13. Some background: Prop 13 was voted into California law in 1978. It caps the amount property taxes may increase each year, limiting property taxes to 1% of the property’s assessed value, which equals the property’s base value, or the value at the time of purchase, plus an inflation factor. For example, a homeowner who has owned their home since the law was passed pays a tax rate based on their home’s value in 1975. The people who voted for Prop 13 in 1978 were mostly seeking to protect older homeowners on fixed incomes from losing their homes due to an inability to keep up with property tax increases. However, it has turned into a regressive tax, with new homeowners shouldering the burden. This is why Prop 13 is often referred to as the “welcome stranger” law. Further, while this is good for neighborhood stability — it’s less tempting to move when you know your property taxes are going to jump even when purchasing within the same tier — it’s bad for turnover, inventory and home sales, which real estate professionals can appreciate. Editor’s note — While real estate agents stand to benefit from amending Prop 13 to reduce the burden on new homeowners while continuing to protect seniors from tax increases, every year first tuesday surveys readers on the issue and the majority continue to support Prop 13 as it stands. A study by the Tax Foundation finds that across the board, governments are forced to compensate for low property taxes (as with Prop 13) by instilling:

higher income tax rates (California has some of the highest in the nation);
higher sales taxes (a regressive tax on low-income earners); and
more business taxes (bad for investment).

Discriminatory homeownership practices On top of higher property taxes, Black and Latinx households contend with additional obstacles when trying to achieve homeownership. For example, homeownership rates plummeted for all demographics following the Millennium Boom. But Black and Latinx homeowners were the greatest impacted, as they were favored targets of predatory lending during the Boom. This is the ugly cousin of redlining, wherein lenders refuse to provide financing or insurance to communities with majority Black or Latinx populations. For example, one of the largest recognized cases of predatory lending was settled by Bank of America (BofA) in 2012 for their subsidiary company, Countrywide’s discriminatory lending practices. Countrywide discriminated against minority homebuyers by:

charging higher fees to minority homebuyers, even when they had equivalent qualifications of White homebuyers; and
steering minority homebuyers into subprime mortgage products, even though many minority homebuyers had equal or better credit histories than other White homebuyers who were not shown bad mortgages.

Since Black and Latinx households were more likely to be steered into subprime mortgages during the Millennium Boom, when it crashed in 2007-2009, this group of new homeowners was less likely to be able to continue their higher mortgage payments.