Black Tax: Evidence of Racial Discrimination in Municipal Borrowing Costs

Abstract

Municipalities with higher proportions of Black residents pay higher borrowing costs to issue rated bonds compared to other cities and counties that issue within the same state and year. These higher costs are unexplained by credit risk, more pronounced in states with higher levels of racial resentment, and robust to state-tax incentives to hold municipal bonds. In time-series tests using political election periods during which racial resentment has been shown to intensify, we find that the differences in borrowing costs also increase. Collectively, the findings illustrate that racial bias can increase borrowing costs, especially where racial resentment is severe.

Keywords: Municipal bonds, Discrimination, Borrowing costs

JEL Classification: H74, J15, G12