In Missouri, individuals who profit from the sale of assets like stocks and real estate may soon benefit from a significant advantage, as the state is set to become the first in the U.S. to exempt capital gains from income tax.

Legislation which gained definitive approval on Wednesday would suspend the capital gains tax for individuals this year and could ultimately abolish it for corporations, provided state revenues continue to increase.

Supporters hope it will help the economy, but critics say getting rid of the capital gains tax will mostly help rich people and mean less tax money for schools and public services. The Republican lawmakers got the bill passed despite Democrats being against it, but only after adding bigger tax breaks for older people and disabled people, and new sales tax rules so people don't pay tax on diapers and products for women.

Missouri's special income tax rule is happening at the same time as at least eight other states with Republican leaders have reduced income tax rates in the usual way this year. Also, Congress is thinking about whether to continue and increase income tax breaks that started when Donald Trump was first president.

What is a tax levied on the profit derived from the sale of assets?

Capital gains represent earnings derived from the disposal of assets, including shares, digital currencies, and real estate. The federal government applies a reduced tax rate to long-term capital gains, accrued from assets owned for over a year, compared to standard income.

In states imposing income tax, capital gains are also subject to taxation; Missouri, along with 31 other states and the District of Columbia, presently aligns capital gains tax rates with those for earned income, while eight states apply a reduced rate to capital gains.

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

What is the rationale behind abolishing the capital gains tax?

Supporters advocating for the elimination of the capital gains tax contend that it hinders investment and encourages individuals to retain assets rather than divest and circulate funds within other sectors of the economy.

"Imposing taxes on something generally leads to a reduction in its prevalence," stated Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an organization of conservative legislators and businesses. "The objective, naturally, is to encourage greater investment within your state."

Although ALEC has historically supported the elimination of state capital gains taxes, Missouri House Speaker Pro Tem Chad Perkins stated the concept originated with him last year from associates at an employee-owned construction firm significantly affected by the tax. He added that his proposed legislation could also provide advantages for family farmers wishing to divest of their property.

Republican state Senator Curtis Trent, who managed the bill in the Senate, argued that the capital gains tax leads to “missed economic chances, financial rigidity, and reduced wages – collectively diminishing Missouri's competitiveness at home and abroad.”

To whom would the repeal of the tax system prove advantageous?

Critics contend that the affluent stand to benefit most significantly.

Abolishing Missouri's capital gains tax could establish "a concerning precedent" across the nation and "exacerbate economic and racial disparities," according to Sam Waxman, deputy director of state policy research at the progressive Center on Budget and Policy Priorities.

A government study revealed that white families are more inclined than certain minority groups to declare capital gains. Among middle-income taxpayers, approximately 8% of white families took advantage of the federal government's tax rates on capital gains and dividends, whereas only 3% of Black families and 1% of Hispanic families did so, according to a 2023 U.S. Treasury Department report.

In Missouri, roughly 542,000 individual income taxpayers declared capital gains in 2022, representing merely one-fifth of all filers, according to the Missouri Budget Project, a non-profit research organisation that stands against the repeal of the capital gains tax. The group projects that four-fifths of the resulting tax reduction would benefit the wealthiest five per cent of taxpayers.

What are the financial effects of getting rid of the capital gains tax?

According to legislative researchers, the elimination of Missouri’s capital gains tax could lead to an estimated annual state revenue loss of approximately $262 million once it is completely put into effect, although this projection is contested by both advocates and detractors.

The Missouri Budget Project projects the annual cost could approach $600 million.

Trent forecasts that the repeal of the tax will stimulate significant economic growth, which he expects to generate greater tax revenue over the long term.

Owen Zidar, a professor of economics and public affairs at Princeton University, studied how 584 changes to capital gains tax rates in different states over 40 years affected things. He found that when these taxes are cut, more people sell assets for a profit. However, this does not bring in enough extra money to make up for the tax revenue that is lost.

Zidar expressed his scepticism regarding assertions that repealing Missouri's capital gains tax will significantly boost investment and economic activity.

“I anticipate a considerable reduction in revenue,” he stated.