JEFFERSON CITY, Mo. (AP) — Investors who realise gains from the sale of stocks, real estate, and other assets could soon benefit even more significantly in Missouri, as the state is set to be the first in the U.S. to exclude capital gains from its income tax.

Legislation that received ultimate consent on Wednesday would suspend the capital gains tax for individuals this year and could potentially abolish it for corporations, provided state revenues continue to expand.

Supporters hope it will boost the economy, but critics say repealing the capital gains tax will mainly help the rich and mean less tax money for public schools and services. The Republican-controlled Legislature got past the Democrats' objections only after adding more tax breaks to the bill for older and disabled people, and creating new sales tax exemptions for things like diapers and feminine hygiene products.

Missouri's special income tax rule is happening at the same time that Republican-led governments in at least eight other states have made the usual income tax rates lower this year. It is also happening while Congress is deciding whether to continue and increase income tax benefits that were put in place during President Donald Trump's first time in office.

Could you elucidate the nature of a capital gains tax?

Capital gains represent the earnings derived from selling assets including stocks, cryptocurrency, or real estate. The federal government levies a tax on long-term capital gains, applicable to assets retained for over a year, at a reduced percentage compared to standard income.

States that levy income tax also typically tax capital gains. According to the non-profit Tax Foundation, Missouri is one of 32 states and the District of Columbia that currently impose capital gains tax at the same rate as earned income and other forms of revenue, while eight states tax capital gains at a reduced rate compared to other income.

On the other hand, some states led by Democrats are doing the opposite. For example, Maryland recently passed a law for a 2% tax on capital gains for people earning more than $350,000. Washington also added a 2.9% tax on capital gains over $1 million. Minnesota already has an extra tax on capital gains and some other investment money over $1 million.

What is the justification for abolishing the capital gains tax?

People who support getting rid of the capital gains tax say it stops people from investing and makes them keep assets instead of selling them and using the money in other parts of the economy.

Imposing taxes on an activity typically results in a reduction of that activity, according to Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an organization comprising conservative legislators and businesses. He added that the underlying principle is naturally to foster greater investment within the state.

Although ALEC has consistently advocated for eliminating state capital gains taxes, Missouri House Speaker Pro Tem Chad Perkins stated the concept originated last year from associates at an employee-owned construction firm adversely affected by the tax. He added that his proposed law could also assist family farmers seeking to divest their property.

Republican state Senator Curtis Trent, who supported the bill in the Senate, said that the tax on profits from selling assets leads to "lost economic chances, financial problems, and lower pay. He believes these things make Missouri less able to compete in the state and with other countries."

Who stands to gain from the tax repeal?

Critics contend the affluent stand to benefit most significantly.

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

A government study showed that white families are more likely to report capital gains than some minority groups. A 2023 U.S. Treasury Department report said that about 8% of middle-income white families benefited from the government’s tax rates on capital gains and dividends. This is much higher than Black families (3%) and Hispanic families (1%).

In Missouri, around 542,000 people who pay income tax reported capital gains in 2022. This was only one-fifth of everyone who filed taxes. This information comes from the Missouri Budget Project, a research group that does not want to get rid of the capital gains tax. The group believes that 80% of the tax savings would go to the richest 5% of taxpayers.

What would be the financial effects of getting rid of the capital gains tax?

Legislative researchers project that repealing Missouri’s capital gains tax might incur an annual cost of approximately $262 million for the state once fully enacted, although this projection faces contention from both proponents and detractors.

According to the Missouri Budget Project, the annual expenditure could approximate $600 million.

Trent believes that getting rid of the tax will lead to "faster economic growth (which) will turn into more tax money" over time.

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

Zidar expressed doubts regarding assertions that the abolition of Missouri's capital gains tax would stimulate considerable investment and economic activity.

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