Althea Greene walks under exposed pipes and into an auditorium, where the chairs are broken and splintering. Treadwell Middle School, built in 1943, looked pretty shabby when Greene was a student here in Memphis 50 years ago. On this August morning, Greene laments that little, if anything, has changed. “We’re lucky it’s still standing,” she says.

No doubt. That same month, a library’s ceiling collapsed in another Memphis school. It had been built 90 years ago. Greene is touring Treadwell because she’s vice chair of the school board, responsible for the 110,000 Memphis children in Tennessee’s largest school system. At another building she visits later that day, water leaks through the ceiling, seeping under the tiles of a classroom and rendering it unfit for students. Not far away, a burst water pipe overflowed into a high school football field, leaving the team to practice in the mud.

There’s a familiar reason the Memphis-Shelby County schools are in sorry shape: Lacking basics such as air conditioning, locks, intercoms, and outdoor lighting, they face $400 million in deferred maintenance. The system relies partly on local property taxes, and its students tend to come from poor families.

Now, scholars in the vanguard of finance, accounting, history, and geography say something else could be making matters even worse: racial bias in the $4 trillion US municipal bond market. To pay for new schools and other major projects, places such as Memphis pay higher interest rates simply because they’re majority Black, the researchers say. They call it the “Black tax.”

Studies are documenting just how much more Black communities pay, as well as the role of racial bias. Finance experts know that many Black communities have higher unemployment and lower incomes—which leads to lower bond ratings and higher interest rates. So the academics are studying reams of bond offerings, attempting to adjust for this situation by comparing communities alike in every way except for race.

Matthew Wynter, a finance professor at Stony Brook University in New York, estimates that Shelby County, which funds Memphis schools, is paying $5 million more each year because of its Black population. Since 1990, he figures, the county has paid $150 million more—enough to wipe out almost 40% of its deferred maintenance expenses. Add up those sums across the US, and the penalty amounts to $900 million annually, more than the entire annual budget of the City of Memphis, according to an estimate by researchers at money manager Breckinridge Capital Advisors Inc. in Boston. “We were shocked,” Wynter says. “It’s pretty ubiquitous.”

Policymakers are taking notice. Last year the US House Financial Services Subcommittee on Oversight and Investigations held a hearing on racial inequity in the municipal bond market. It focused largely on a paper finding that historically Black colleges and universities pay more when issuing munis. Al Green, a Texas Democrat who chairs the subcommittee, called the findings “profoundly troubling.”

The National League of Cities is examining this issue with a $4 million grant from the Robert Wood Johnson Foundation. In July the Brookings Institution’s annual municipal finance conference, which attracts scores of academics and other experts from across the country, held a session on the Black tax. “Regulators are watching and taking evidence very seriously,” says Justin Marlowe, a professor at the University of Chicago and one of the conference’s organizers, citing the US Securities and Exchange Commission and the Municipal Securities Rulemaking Board. The MSRB says it’s looking at the research. The SEC declined to comment.

Bank of America, Citigroup, and JPMorgan Chase, the biggest US municipal bond underwriters last year, also declined to comment, as did other companies asked to discuss the issue. But Gary Hall, who leads public finance at Siebert Williams Shank & Co., the largest ­minority-owned investment bank, defended the industry in the congressional hearing: “We would not have repeat clients if we didn’t obtain the lowest cost of financing possible based on fundamentals of credit and risk.”

In his office overlooking the Mississippi River, Shelby County Mayor Lee Harris, a Yale-educated lawyer who grew up in Memphis, says he doesn’t know exactly what to make of the idea of a Black tax. Like many municipal officials, Harris, who’s Black, says he doesn’t know enough about the market’s intricacies. “If the interest-rate variation is high just based on the minority population, that would be really troubling and problematic for us because we do a lot of borrowing,” says the mayor, whose county has about $1 billion in debt.

One thing Harris does know: The schools are in terrible shape, and millions of dollars could make a world of difference. Memphis hasn’t built a new high school for 14 years. “And we have got to make that happen,” he says.

{snip}

Stony Brook’s Wynter dug into the muni data after the murder of George Floyd in 2020. {snip} His main finding: Issuers pay a little less than half a basis point (half of one-hundredth of a percentage point, the difference between 3.00% and 3.005%) more in borrowing costs for every additional percentage point of Black population.

For majority-Black communities, that tiny figure can add up to real money. Consider Shelby County. It’s 55% Black. Wynter figures it pays about 24 basis points more than a financially similar White community. That amounts to a $150 million penalty since 1990. {snip}

The most benign reason for the penalty would be that the data don’t fully account for a difference in the finances of the municipalities they’re comparing. The least: Investors don’t like Blacker cities. To look for evidence of discrimination, Wynter and other scholars reviewed measures of what social scientists call “racial animus”—for example, racially charged tweets about President Barack Obama’s reelection. Did regions with higher measures of animus punish Blacker cities?

{snip}