Investors who profit from selling stocks, real estate and other assets soon could reap an even larger benefit in Missouri, which is poised to become the first U.S. state to exempt capital gains from its income tax.
Legislation that won final approval Wednesday would halt the capital gains tax this year for individuals and could eventually eliminate it for corporations, if state revenues keep growing. The tax repeal now heads to Republican Gov. Mike Kehoe, who has said he’s “very supportive” of it.
Though proponents hope it can spur the economy, detractors assert that the capital gains tax repeal will primarily benefit the rich and result in less tax revenue for public schools and services. The Republican-led Legislature overcame objections by Democrats only after expanding the bill with greater tax breaks for seniors and disabled residents and new sales tax exemptions for diapers and feminine hygiene products.
Missouri’s unique income tax carve-out comes as Republican-led legislatures in at least eight other states have passed more traditional income tax rate reductions this year. It also comes as Congress weighs whether to renew and expand income tax breaks enacted during President Donald Trump’s first term in office.
What is a capital gains tax?
Capital gains are profits from the sale of assets such as stocks, cryptocurrency or property. The federal government taxes long-term capital gains, on assets held for more than a year, at a lower rate than ordinary income.
All states that tax income also tax capital gains. Missouri currently is among 32 states and the District of Columbia that tax capital gains at the same rate as wages and other income, according to the nonprofit Tax Foundation. Eight states tax capital gains at a lower rate than other income.
Some Democratic-led states have been moving in the opposite direction. Maryland lawmakers last month passed a bill that would impose a 2% capital gains tax on those with incomes over $350,000. And Washington lawmakers recently passed legislation to impose an extra 2.9% tax on capital gains over $1 million. Minnesota already imposes a surcharge on capital gains and other investment income over $1 million.
What’s the case for eliminating the capital gains tax?
Proponents of axing the capital gains tax say the tax discourages investment and incentivizes people to hold onto assets instead of selling them and spending money elsewhere in the economy.
“When you tax something you get less of it,” said Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an association of conservative lawmakers and businesses. “The idea is, of course, you want more investment in your state.”
Though ALEC has long backed the repeal of state capital gains taxes, Missouri House Speaker Pro Tem Chad Perkins said the idea came to him last year from friends at an employee-owned construction company that was getting hit with the tax. He said his legislation also could benefit family farmers who want to sell their land.
The capital gains tax results in “lost economic opportunity, financial sclerosis, lower wages — all of which serve to make Missouri less competitive both domestically and internationally,” said Republican state Sen. Curtis Trent, who handled the bill in the Senate.
Who would benefit from the tax repeal?
Opponents say the wealthy will get the greatest reward.
Repealing Missouri’s tax on capital gains would set “a worrisome precedent” nationally and “worsen economic and racial inequities,” said Sam Waxman, deputy director of state policy research at the liberal-leaning Center on Budget and Policy Priorities.
One government study found that white families are more likely to report capital gains than some minorities. Among middle-income taxpayers, about 8% of white families benefited from the federal government’s tax rates on capital gains and dividends compared to just 3% of Black families and 1% of Hispanic families, according to a 2023 U.S. Treasury Department report.
In Missouri, about 542,000 individual income taxpayers reported capital gains in 2022, amounting to just one-fifth of all filers, according to the Missouri Budget Project, a nonprofit research group that opposes the capital gains tax repeal. The group estimates that 80% of the tax relief would go to the wealthiest 5% of taxpayers.
What’s the cost of repealing the capital gains tax?
Legislative researchers estimate Missouri’s capital gains tax repeal could cost the state about $262 million annually when fully implemented. But that’s disputed by both supporters and opponents.
The Missouri Budget Project estimates the cost could be nearly $600 million annually.
Trent predicts the tax repeal will trigger “increased economic growth (that) will translate into increased tax revenue” over time.
Owen Zidar, an economics and public affairs professor at Princeton University, studied the impacts of 584 capital gains tax rate changes in states over four decades. Capital gains tax cuts tend to result in more people selling assets for gains, but not so much as to offset the lost tax revenue, he said.
Zidar said he is skeptical of claims that Missouri’s capital gains tax repeal will attract a lot of investment and economic activity.
“I think it’s going to be a substantial revenue decrease,” he said.
This story was originally featured on Fortune.com
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