RACIAL EQUITY AND TAXATION

TAX JUSTICE IS RACIAL JUSTICE:
MICHIGAN’S CURRENT TAX STRUCTURE HARMS BLACK AND BROWN RESIDENTS

Michigan’s tax system both maintains and worsens racial economic inequities. “Colorblind” practices obscure historical disparities between race and ethnicity.
Local governments’ inability to raise sufficient revenue is a racial justice issue. Economic inequity reinforces racial inequity.
Tax policy solutions can help mitigate the harm — in Michigan, this includes the state’s Earned Income Tax Credit (EITC) and the Homestead Property Tax Credit (HPTC). Many of the tax reforms that are discussed in other sections of our Tax Policy Basics not only reduce economic inequities but racial inequities as well.

1. Michigan should use tested and data-backed tools, such as expanding our state EITC or implementing a state-level Child Tax Credit (CTC), to help address racial disparities within our communities. Most importantly, the temporary expansion of the federal CTC in 2021 had a noticeable impact on reducing racial inequity between white earners and their Black and Hispanic counterparts.
2. The state should fully fund revenue sharing to ensure local governments can meet the needs of their residents.

While tax policies are often thought to be “race neutral” on their surface, how states raise revenue and what services they choose to finance can have important implications for racial equity. Although tax liabilities are not determined based on race, tax policies that ignore racial bias and discrimination can deepen existing inequities.^[1] In other words, our tax system doesn’t create racial inequality, rather it significantly contributes to pre-existing inequalities.

Decades of policy advantage and privilege have led to a situation where white families have seven times the wealth of Black families and four times the wealth of Hispanic families.^[2] Although Black household wealth has never been higher (largely thanks to net equity from homeownership), the white-Black racial wealth gap is outpacing the positive gains seen by Black families.^[3] While Black household wealth has increased 121% since 1989, the white-Black racial wealth gap has grown 169%. These inequities persist in large part due to regressive tax policies, such as the flat income tax, the weakened corporate tax, the preference of capital over labor, and the virtual elimination of the estate tax. As the primary funders of most public services, state and local governments are well equipped to promote equity but are frequently held back by regressive revenue sources.

Black households are overrepresented in low-wage jobs. Despite earning the lowest average incomes, Black households pay the highest effective tax rate in the state. Constraints on taxes built into the state constitution, such as the flat income tax or property tax limitations, contribute to a regressive system that makes it difficult for Black, Indigenous, and Hispanic communities to build wealth while failing to address the state’s severe economic inequality.

This disproportionate tax liability on Black families has persisted for centuries, most notably through a systematic dispossession of Black-owned property and land. In the last 150 years, it is estimated conservatively that Black Americans have been overtaxed at a level of $300 billion.^[4] To truly create a more equitable and just tax system, “colorblind” approaches do very little to address historical disparities that precede any tax system.

While the majority of household taxes go to the state to fund services like education and health and human services, local units of government are responsible for many of the goods and services we use every day — fire services, local roads, parks, public safety and more. Notably, the vast majority of local governments are barred from levying taxes on sales and income, meaning most cities, villages and townships rely on revenues almost exclusively from property taxes. Such levy limits contribute to chronic underfunding and underinvestment.

A handful of cities have adopted a city income tax, which must be approved through a local ballot initiative. As of 2025, just 24 cities in Michigan levied a local income tax, generally at a rate of 1% for residents and 0.5% for non-residents, with specific exceptions. Corporate income can also be taxed at the city level, with rates ranging from 1% to 2%. Cities with a city income tax tend to have a larger population and larger budget overall, but they rely substantially less on property taxes to meet budget needs, making these tax systems relatively more progressive.

Local governments’ reliance on property taxes comes with its own set of racial equity challenges. Research shows the assessment ratio (a ratio of a property’s assessed value to its sales price) for the average Black property owner is 12.7% higher than for a white property owner.^[5] Although Michigan law requires property to be assessed at 50% of true cash value, evidence from Detroit following the Great Recession demonstrates all properties were being over-assessed, and the properties with the lowest real market values were the most over-assessed.

Despite recent progress in the increase in Black homeownership and Black housing wealth, Black-owned homes still have a lower median value than white-owned homes. A recent study found that 65% of Detroit homes in the lowest decile were overassessed compared to only 11% in the highest decile. The study found systemic regressivity in Detroit, meaning that lower-priced homes (the bottom 50% of home prices) were more likely to be overassessed than higher-priced homes.^[6] This isn’t just a Detroit problem, but a nationwide problem.^[7] And although this regressivity has improved since past analysis, this remains a challenge for local assessors, and a racial equity issue for policymakers.

While the state historically used revenue sharing to compensate local governments for services they are required to provide, these payments have declined significantly since it was last fully funded in 2001. The decline can be attributed to a decrease of statutory revenue sharing, not constitutional revenue sharing. As of 2024, revenue sharing totaled $1.3 billion, but this falls far below the full funding level of $2.3 billion.^[8] As a result, some local governments turn increasingly to fines and fees for revenue, a policy decision that disproportionately harms households with low incomes. Fully funding state revenue sharing in addition to diversifying local revenue sources could make Michigan’s tax system less regressive.

The state should adopt a needs-based formula for state revenue sharing. Increased revenue sharing would not only ensure sufficient revenue for local government services, but it would also introduce greater equity to municipal financing.
In addition to the expanded EITC, Michigan should adopt a statewide CTC and expand the HPTC. Implementing a state CTC will advance racial equity because Black and Hispanic children disproportionately live in households with low incomes. Additionally, an expansion of the HPTC, which includes renters, will target more taxpayers with low incomes.
Currently, local governments’ ability to raise taxes beyond property taxes are constitutionally limited, and this places constraints on their ability to deliver services for their communities, especially low-income communities. Giving local governments the option to tap into different tax bases would greatly enhance economic and racial equity.

^[1] Michael Leachman, Michael Mitchell, Nicholas Johnson, and Erica Williams. “Advancing Racial Equity With State Tax Policy.” Center on Budget and Policy Priorities, November 15, 2018. https://www.cbpp.org/research/state-budget-and-tax/advancing-racial-equity-with-state-tax-policy.

^[2] “Greater Wealth, Greater Uncertainty: Changes in Racial Inequality in the Survey of Consumer Finances, Accessible Data.” Board of Governors of the Federal Reserve System, October 23, 2023. https://www.federalreserve.gov/econres/notes/feds-notes/greater-wealth-greater-uncertainty-changes-in-racial-inequality-in-the-survey-of-consumer-finances-accessible-20231018.htm#fig1.

^[3] Perry, Andre M., Hannah Stephens, and Manann Donoghoe. 2024. “Black Wealth Is Increasing, but so Is the Racial Wealth Gap.” Brookings. January 9, 2024. https://www.brookings.edu/articles/black-wealth-is-increasing-but-so-is-the-racial-wealth-gap/.

^[4] Hassan, Adeel. 2024. “An Enduring Race Tax.” The New York Times, April 26, 2024. https://www.nytimes.com/2024/04/26/us/black-americans-homeownership.html.

^[5] Carlos Avenancio-León and Troup Howard. “The Assessment Gap: Racial Inequalities in Property Taxation.” Washington Center for Equitable Growth, June 10, 2020. https://equitablegrowth.org/working-papers/the-assessment-gap-racial-inequalities-in-property-taxation/.

^[6] Barrett, Malachi. 2024. “Council Responds to Overtaxation Study, Assessor Says It’s Too Late.” BridgeDetroit. March 27, 2024. https://www.bridgedetroit.com/council-responds-to-overtaxation-study-assessor-says-its-too-late/.

[7] The Editorial Board. 2021. “Opinion | How Lower-Income Americans Get Cheated on Property Taxes.” The New York Times, April 3, 2021. https://www.nytimes.com/2021/04/03/opinion/sunday/property-taxes-housing-assessment-inequality.html.

[8] Gielczyk, Ben. 2024. Review of Budget Briefing: State Revenue Sharing. House Fiscal Agency. https://house.mi.gov/hfa/PDF/Briefings/State_Revenue_Sharing_Budget_Briefing_fy24-25.pdf.