Black households would bear disproportionate burden of sales tax renewal

The legacy of slavery, Jim Crow era policies and systemic discrimination have resulted in black Louisianans having, on average, worse economic outcomes than their white counterparts. African Americans are more likely than whites to have household earnings that fall in the bottom 40 percent – or less than $37,000 per year. Since households in the lower brackets typically spend most of their income on necessities, they are more affected by a state sales tax than households at the top.

That means any effort to renew part of the the existing “clean penny” of sales tax will disproportionately affect families of color. To offset this impact, the Legislature should consider increasing the state’s Earned Income Tax Credit (EITC) during the upcoming special session.   

As discussed in a recent LBP policy brief, the Legislature is likely to consider a partial renewal of the temporary “clean penny” of sales tax established in 2016 as a means to close the $648 million budget shortfall in the upcoming special session. As lawmakers consider renewing a portion of the temporary sales tax, they should also consider increasing the state’s Earned Income Tax Credit (EITC) to offset the disproportionate impact of the sales tax renewal on low-income families and particularly families of color.

African Americans make up one-third of Louisiana’s population, but represent 53 percent of households in the lowest-earning 20 percent of households, those making an average of $9,240 per year. African American households make up 44 percent of those in the second income quintile, which includes households making an average of $27,873 per year.

If lawmakers renew half or three-fourths of the temporary penny, those in the bottom fifth of income earners would be spending six times as much of their income on the sales tax renewal than households in the top 1 percent.  

Lawmakers can address this imbalance by expanding Louisiana’s EITC. An increase of the state EITC from 3.5 percent to 7 percent of the federal EITC would offset a half-cent cent sales tax renewal for families in the bottom 40 percent of income earners. An EITC increase from 3.5 percent to 10 percent would offset a three-quarter cent renewal for the same income groups, the majority of which are families of color.

Increasing the state EITC would could also help to improve socioeconomic outcomes for households and children of color. Research shows children whose families receive an income boost via the EITC are more likely to do better and stay in school longer. The EITC also has been shown to help working women, and particularly single moms, move into the labor force and boost their earnings over the course of their working years.

Relying on primarily on sales tax revenue to address the budget shortfall would amount not only to balancing the budget on the backs of low-income households, but it would also require African American households to carry more of the load than white households, as a percentage of their average income. Expanding the state EITC would not only help to offset some of the sales tax burden on low-income families of color, it also would help to put them on a path to improved economic outcomes.

Methodological note: The breakdown of Louisiana’s income quintiles by race are derived from a two-year average of 2015 and 2016 American Community Survey data. The impact of sales tax renewal and EITC increases by income quintile are derived from IRS Public Use Tax files. Because of the different data sources, the two income quintiles ranges within the two analyses do not exactly match.  Both analyses include singles and couples, with and without children who are under the age of 65.