In Missouri, investors who gain from selling assets like stocks and real estate may soon benefit even more, as the state is likely to become the first in the U.S. to exempt capital gains from income tax.

A piece of legislation that received definitive approval on Wednesday would suspend the capital gains tax for individuals this year and could potentially abolish it for corporations, contingent upon sustained growth in state revenues.

Supporters hope it will help the economy, but critics say removing the capital gains tax will mostly help rich people and mean less tax money for public schools and services. The Republican-controlled government group finally got past the Democrats' objections by adding more tax breaks for older people and disabled people, and new sales tax exceptions for things like diapers and products for women.

Missouri's special income tax rule is happening at the same time as Republican-led governments in at least eight other states have approved the usual income tax cuts this year. Also, Congress is thinking about whether to continue and make bigger the income tax benefits that started when President Donald Trump first became president.

Could you elucidate the concept of a capital gains tax?

Capital gains, representing profits generated from divesting assets like securities, digital currencies, or real estate, are subject to federal taxation; specifically, long-term capital gains on assets held for over twelve months are taxed at a reduced rate compared to standard income.

In most states that levy an income tax, capital gains are also taxed. According to the non-profit Tax Foundation, Missouri is presently one of 32 states, including the District of Columbia, where capital gains are taxed at the identical rate as earned income and other revenue streams. Conversely, eight states apply a reduced tax rate to capital gains compared to other income sources.

Several states led by Democrats have implemented contrasting fiscal policies, with Maryland enacting a 2% capital gains tax on incomes exceeding $350,000, Washington introducing an additional 2.9% tax on capital gains above $1 million, and Minnesota maintaining a surcharge on capital gains and other investment income surpassing $1 million.

What justifications support the abolition of the capital gains tax?

Those who support getting rid of the capital gains tax say it makes people invest less and encourages them to keep their assets instead of selling them and spending the money in other parts of the economy.

"Taxing a particular item leads to a reduction in its availability," explained Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an association comprising conservative lawmakers and businesses. "The underlying principle, naturally, is to encourage greater investment within your state."

Although ALEC has consistently supported abolishing state capital gains taxes, Missouri House Speaker Pro Tem Chad Perkins stated that the proposal originated with him last year, inspired by acquaintances at an employee-owned construction firm severely affected by the tax. He added that his bill could also be advantageous for family farmers seeking to sell their property.

Republican state Senator Curtis Trent, who oversaw the bill in the Senate, argued that the capital gains tax leads to "squandered economic potential, financial stagnation, and diminished wages," claiming these factors collectively hinder Missouri's competitiveness on both national and global scales.

Who stands to gain from the abrogation of the tax?

Opponents contend that the affluent stand to gain the most.

Sam Waxman, who is the deputy director of state policy research at the liberal 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 study revealed that white households are more inclined to declare capital gains compared to certain minority groups. The 2023 U.S. Treasury Department report indicated that approximately 8% of middle-income white families profited from federal tax rates on capital gains and dividends, in contrast to merely 3% of Black families and 1% of Hispanic families.

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 cut would help the richest 5% of taxpayers.

What will happen to the economy if they cancel the capital gains tax?

Legislative researchers believe repealing Missouri's capital gains tax could cost the state around $262 million each year when it is completely in place. However, this amount is questioned by both those who support it and those who are against it.

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

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

Owen Zidar, a professor at Princeton University who studies economics and public affairs, looked at how 584 changes to capital gains tax rates in different states affected things over forty years. He found that when these taxes are cut, more people sell assets for a profit. However, this increase in selling is not enough to make up for the money the government loses from the lower tax rate.

Zidar expressed reservations regarding assertions that abolishing Missouri's capital gains tax would significantly stimulate investment and economic activity.

“I anticipate a considerable decline in revenue,” he remarked.