Investors profiting from the sale of stocks, real estate, and other assets could soon realise an even greater advantage in Missouri, as it prepares to be the initial U.S. state to exclude capital gains from its income tax.

Legislation that received definitive approval on Wednesday aims to suspend the capital gains tax for individuals this year, with the potential for its eventual elimination for corporations, assuming sustained growth in state revenues. The proposed tax repeal will now be sent to Republican Governor Mike Kehoe, who has indicated his strong support.

Supporters believe it will boost the economy, but critics argue that removing the capital gains tax will mainly help wealthy people and lead to less tax money for public schools and services. The Republican-controlled Legislature finally got past the Democrats' objections by adding more tax breaks for older and disabled people, as well as new sales tax exceptions for items like diapers and feminine hygiene products.

Missouri's distinctive income tax exception emerges concurrently with Republican-controlled legislatures in at least eight other states enacting more conventional income tax rate reductions this year. Furthermore, it coincides with Congress deliberating whether to extend and broaden the income tax concessions implemented during President Donald Trump's initial term.

Could you define what a capital gains tax entails?

Capital gains are profits derived from divesting assets like stocks, cryptocurrencies, or real estate. The federal government imposes a preferential tax rate on long-term capital gains, realized from assets held for over twelve months, compared to the tax applied to ordinary income.

In states that levy income tax, capital gains are also subject to taxation; Missouri, for instance, is one of 32 states and the District of Columbia where capital gains are taxed at parity with earned income, while eight other states apply a reduced tax rate to such gains.

On the other hand, some states with Democratic leaders are doing the opposite. For example, last month, lawmakers in Maryland passed a law to add a 2% tax on capital gains for people who earn more than $350,000. Also, lawmakers in Washington recently passed a law to add an extra 2.9% tax on capital gains over $1 million. Minnesota already has an extra tax on capital gains and other money from investments over $1 million.

What arguments support the abolition of the capital gains tax?

People who want to get rid of the capital gains tax say it stops people from investing and makes them keep their assets instead of selling them and spending money in other parts of the economy.

Jonathan Williams, who serves as president and chief economist at the American Legislative Exchange Council, an association representing conservative lawmakers and businesses, stated that imposing taxes on something tends to reduce its prevalence, adding that the objective is, naturally, to stimulate greater investment within a state.

Even though ALEC has always supported getting rid of state capital gains taxes, Missouri House Speaker Pro Tem Chad Perkins said he got the idea last year from friends at a construction company owned by its employees. This company was being affected by the tax. He also said his proposed law could help family farmers who want to sell their land.

The capital gains tax leads to a loss of economic prospects, financial stagnation, and reduced wages, collectively hindering Missouri's competitiveness both within the country and on the global stage, according to Republican state Senator Curtis Trent, who was responsible for the bill in the Senate.

Who stands to gain from the tax repeal?

Critics contend that the most substantial benefits will accrue to the affluent.

Getting rid of Missouri's tax on capital gains would create "a worrying example" for the country and "make economic and racial differences worse," according to Sam Waxman, who is the deputy director of state policy research at the liberal Center on Budget and Policy Priorities.

A government study indicated that white families exhibit a higher propensity to report capital gains compared to certain minority groups. A 2023 U.S. Treasury Department report revealed that approximately 8% of middle-income white taxpayers benefited from federal tax rates on capital gains and dividends, in contrast to merely 3% of Black families and 1% of Hispanic families.

According to the Missouri Budget Project, a non-profit research organization opposing the abolition of the capital gains tax, approximately 542,000 individual income taxpayers in Missouri declared capital gains in 2022, representing merely 20% of all filers. This group projects that four-fifths of the tax reduction would benefit the top 5% of taxpayers in terms of wealth.

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

When the repeal of Missouri's capital gains tax is fully in effect, legislative analysts calculate it could incur an annual expense to the state of roughly $262 million, although both proponents and detractors contest this figure.

According to estimates from the Missouri Budget Project, the annual cost could approach $600 million.

Trent thinks getting rid of the tax will lead to faster economic growth, which will bring in more tax money over time.

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

Zidar said he doubts that getting rid of Missouri's tax on investment profits will bring in a lot of money and business.

"I anticipate a significant decline in revenue," he remarked.