JEFFERSON CITY, Mo. (AP) — Investors realizing gains from the sale of stocks, real estate, and other assets may soon see a greater advantage in Missouri, as the state is set to become the first in the U.S. to exclude capital gains from its income taxation.

Legislation that received final assent on Wednesday is poised to suspend the capital gains tax for individuals this year and potentially abolish it for corporations down the line, contingent upon sustained growth in state revenues. The tax repeal measure now proceeds to Republican Governor Mike Kehoe, who has expressed considerable support for it.

While supporters hope it will boost the economy, critics argue that removing the capital gains tax will mainly help wealthy people and mean less tax money for public schools and services. The Republican-controlled government managed to pass the bill despite objections from Democrats, but only after adding bigger tax breaks for older and disabled people, and new sales tax exemptions for items like diapers and feminine hygiene products.

Missouri has a special income tax rule, which is happening at the same time that Republican-controlled governments in at least eight other states have lowered income tax rates in the usual way this year. Also, Congress is thinking about whether to bring back and increase the income tax breaks that were put in place when President Donald Trump was first in office.

Could you clarify the concept of a capital gains tax?

Capital gains are profits derived from the sale of assets including stocks, cryptocurrency, or property.

In states with income tax, capital gains are also taxed; Missouri, along with 31 other states and D.C., applies the same tax rate to capital gains as to earned income and other revenue streams, based on data from the Tax Foundation, a non-profit organization, while eight states implement a reduced rate for capital gains compared to other income types.

On the other hand, some states led by Democrats have been doing the opposite. For example, lawmakers in Maryland recently approved a law to add a 2% tax on capital gains for people earning more than $350,000. In Washington, lawmakers passed a law to add another 2.9% tax on capital gains over $1 million. Minnesota already has an extra tax on capital gains and other investment money over $1 million.

What is the rationale behind abolishing the capital gains tax?

People who want to get rid of the capital gains tax say it makes people not want to invest and makes them keep their assets instead of selling them and spending the money in other parts of the economy.

"Taxation diminishes the quantity of the taxed item," stated Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an organisation comprising conservative legislators and enterprises. "The intention, naturally, is to encourage greater investment within your state."

Even though ALEC has supported getting rid of state capital gains taxes for a long time, Missouri House Speaker Pro Tem Chad Perkins mentioned that the idea came to him last year from friends at a construction company owned by its employees, which was being affected by the tax. He added that his proposed law could also help family farmers who want to sell their land.

Republican state Senator Curtis Trent, who was in charge of the bill in the Senate, said that the capital gains tax causes "lost economic chances, financial problems, and lower pay." He added that these things make Missouri less able to compete in the country and around the world.

To whom would the abolition of the tax be advantageous?

Critics contend the affluent will receive the most significant benefits.

Sam Waxman, who is the deputy director of state policy research at the liberal-leaning Center on Budget and Policy Priorities, said that getting rid of Missouri’s tax on capital gains would create a worrying example for the whole country and make economic and racial differences worse.

A government analysis revealed that white households were more prone to declare capital gains than certain minority groups. Within the demographic of middle-income taxpayers, approximately 8% of white families took advantage of the federal tax benefits on capital gains and dividends, whereas only 3% of Black families and 1% of Hispanic families did so, according to a 2023 report from the U.S. Treasury Department.

In Missouri, around 542,000 individual income taxpayers declared capital gains in 2022, representing only a fifth of all those filing returns, as reported by the Missouri Budget Project, a non-profit research organisation that is against the repeal of the capital gains tax. The organisation estimates that 80% of the tax relief would be directed towards the wealthiest 5% of taxpayers.

What are the financial implications of revoking the capital gains tax?

Legislative analysts project that repealing Missouri's capital gains tax could result in an annual state revenue loss of roughly $262 million upon full enactment, a figure contested by both proponents and adversaries.

According to estimations by the Missouri Budget Project, the annual cost could approximate $600 million.

Trent believes that getting rid of the tax will lead to faster economic growth, which will mean more tax money over time.

Owen Zidar, a professor of economics and public affairs at Princeton University, investigated the ramifications of 584 adjustments to capital gains tax rates across various states over a forty-year period. He noted that reductions in capital gains taxes typically encourage individuals to dispose of assets for profit, yet this increased activity is generally insufficient to compensate for the resulting deficit in tax income.

Zidar expressed reservations about the assertion that repealing Missouri's capital gains tax would significantly stimulate investment and economic activity.

"I anticipate a substantial decline in revenue," he stated.