As Kriss wrote yesterday, the governor’s budget includes a new capital gains tax (link to detail on governor’s web page is currently down). The essence:
The Governor proposes a new capital gains tax on the sale of stocks, bonds and other assets to increase the share of state taxes paid by our state’s wealthiest taxpayers. The state would apply a 7 percent tax to capital gains earnings above $25,000 for individuals and $50,000 for joint filers, starting in the second year of the biennium.
…After exemptions are provided to remove any capital gains tax on retirement accounts, homes, farms and forestry, the proposal will raise an estimated $798 million in fiscal year 2017.
As Jason Mercier of the Washington Policy Center was quick to point out, the idea isn’t totally new. HB 2563 was introduced in the House in 2012, with a fiscal note speculating the proposed 5 percent capital gains tax would raise more than $1.4 billion in the 2013-15 biennium. The measure never came to a vote. From the fiscal note:
Capital gains are extremely volatile from year to year.
Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly
from the amounts presented here.
With the governor making capital gains a centerpiece of his revenue legislation, expect more discussion of the tax in the coming year. While it faces tough sledding, particularly in the Republican state Senate, it also has its proponents. So we should spend some time assessing the tax.
The Tax Foundation’s recently published Business in America report offers an in-depth look at the way America taxes businesses, placing the U.S. tax structure in a global context. A very accessible chartbook, the report deserves the RTWT tag. We’ll just note that the U.S. imposes an internationally high capital gains burden.
If a corporation retains its earnings, it can boost the value of its stock. As a result, shareholders can realize a capital gain. The United States also places a high tax burden on capital gains income. The U.S. average top marginal tax rate on capital gains of 28.7 percent is the 6th highest rate in the OECD and is more than 10 percentage points higher than the simple average of 18 percent across the 34 countries. Nine countries don’t tax capital gains.
Last February, the Tax Foundation published “How High are Capital Gains in Your State?” from which the map at the top of this page is taken.
Taking into account the state deductibility of federal taxes, local income taxes, the phase-out of itemized deduction, and any special treatment of capital gains income, this map shows the combined federal, state and local top marginal tax rate on capital gains by state.
The state with the highest top marginal capital gains tax rate is California (33 percent), followed by New York (31.5 percent), Oregon (31 percent) and Minnesota (30.9 percent).
The governor’s proposed 7 percent rate would be the 11th highest state capital gains tax rate in the nation, tied with South Carolina, according to the Tax Foundation’s February report, The High Burden of State and Federal Capital Gains Tax Rates. The report examines also the economic impact of capital gains taxes. For example,
The United States’ high tax burden on capital gains has long-term negative implications for the economy. This non-neutral tax creates a bias against savings, slows economic growth, and harms U.S.’s competitiveness.
Capital Gains Tax is One of Many Taxes on the Same Dollar
Capital gains taxes represent an additional tax on a dollar of income that has already been taxed multiple times. For example, take an individual who earns a wage and decides to save by purchasing stock. First, when he earns his wage, it is taxed once by the federal and state individual income tax. He then purchases stock and lets his investment grow. However, that growth is smaller than it otherwise would have been due to the corporate income tax on the profits of the corporation in which he invested. After ten years, he decides to sell the stock and realize his capital gains. At this point, the gains (the difference between the value of the stock at purchase and the value at sale) are taxed once more by the capital gains tax. Even more, the effective capital gains tax rate could be even higher on your gains due to the fact that a significant difference in the value of the stock is due to inflation and not real gains.
There’s more, which we’ll surely get into in the coming months. But for an interesting take on the tax from the leading newspaper in an adjacent state with the nation’s second highest capital gains tax rate, consider this 2012 editorial from the Oregonian.
To be sure, the people affected most by capital gains taxes probably don’t buy ramen noodles by the case. That doesn’t mean, however, that all – or even most – people use their capital gains to buy boats, champagne, poodles or whatever it is rich people are supposed to enjoy.
In many cases, capital gains go right back to work, which is to say they’re poured into businesses, property or anything else investors consider potentially lucrative – emphasis on potentially. An investment that promises to be lucrative can turn out to be disastrous because, you know, investing involves risk. That’s one reason why capital gains are often taxed at a lower rate than regular income.
Why should those who don’t have money to invest value such tax-code incentives? Because other people’s investments allow companies to grow, allowing those businesses to hire more people, who, in turn, buy stuff and pay taxes. The more heavily you tax capital gains, the more expensive private capital becomes for the small businesses so many Oregonians support.
Noting outmigration from Oregon to Washington’s Clark County, the editorial says,
The rates imposed by individual states matter because people may move freely, and taxpayers can time their capital gains.
The editorial was part of a series suggesting the need to reform Oregon’s highly progressive tax structure. Read the whole thing. The conclusion bears repeating.
It’s a lot harder to explain the benefits of lower rates on capital gains and income than it is to say, “No tax breaks for the rich.” But no one said improving Oregon’s tax code would be easy.
Tax policy is complicated. And potentially getting more so here.