JEFFERSON CITY, Mo. (AP) — Those who invest and profit from selling stocks, property, and other holdings may soon enjoy an even greater advantage in Missouri, as the state is set to become the initial U.S. state to remove capital gains from its income tax assessment.

A new law, which was finally approved on Wednesday, would stop the capital gains tax for individuals this year and might remove it completely for companies if the state's income continues to increase. The plan to get rid of the tax will now go to Republican Governor Mike Kehoe, who has said he strongly supports it.

While supporters hope it will help the economy, critics say that getting rid of the capital gains tax will mostly help wealthy people and mean less tax money for public schools and services. The Republican-controlled Legislature got past objections from Democrats only after adding more tax breaks for older and disabled people and new sales tax exceptions for things like diapers and products for women's hygiene.

Missouri's special income tax rule is happening at the same time that Republican-led governments in at least eight other states have approved more typical income tax cuts this year. It is also happening while Congress is thinking about whether to bring back and make bigger the income tax breaks that started when President Donald Trump was first in office.

Could you elaborate on the concept of a capital gains tax?

Capital gains are defined as the financial benefits accrued from the disposition of assets including securities, digital currencies, and real estate. The federal government imposes a lower tax rate on long-term capital gains, derived from assets retained for exceeding a year, compared to standard income.

In many of the states that impose income taxes, capital gains are also subject to taxation, with Missouri being one of 32 states, alongside the District of Columbia, that tax such gains at the same rate as salaries and other forms of income, while a smaller group of eight states applies a reduced tax rate to capital gains.

On the other hand, some states led by Democrats are doing the opposite. For example, Maryland recently passed a law to add a 2% tax on investment profits for people earning over $350,000. Washington also recently approved a law to add another 2.9% tax on investment profits over $1 million. Minnesota already has an extra tax on investment profits and other money earned from investments over $1 million.

What are the justifications put forth for abolishing the capital gains tax?

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

"Taxing a particular thing tends to result in a reduced quantity of it," stated Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an organisation comprising conservative lawmakers and businesses. "The fundamental objective is to encourage greater investment within your state."

Although 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.

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

Who stands to gain from the tax repeal?

Those who oppose the measure argue that the most substantial benefits will accrue to the affluent.

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

According to a 2023 U.S. Treasury Department report, a government study revealed that white families are more prone to declaring capital gains than certain minority groups. Among middle-income taxpayers, approximately 8% of white families benefited from the federal government’s tax rates on capital gains and dividends, in contrast to merely 3% of Black families and 1% of Hispanic families.

In Missouri, approximately 542,000 individual income taxpayers reported capital gains in 2022, constituting only one-fifth of all filers, according to the Missouri Budget Project, a nonprofit research organization that opposes the repeal of the capital gains tax; this group estimates that four-fifths of the tax relief would benefit the most affluent 5% of taxpayers.

What is the estimated cost of rescinding the capital gains tax?

Legislative analysts project the repeal of Missouri's capital gains tax could result in an annual state revenue loss of approximately $262 million once fully operational; however, this estimate is contested by proponents and detractors alike.

The Missouri Budget Project estimates the annual cost could be nearly $600 million.

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

Owen Zidar, a Professor of Economics and Public Affairs at Princeton University, investigated the consequences of 584 alterations to capital gains tax rates across various states spanning forty years, observing that reductions in this tax typically encourage asset sales for profit, though not sufficiently to compensate for the resulting decrease in tax income.

Zidar said he doubts the claims that getting rid of Missouri's capital gains tax will bring in a lot of investment and economic activity.

He anticipated a considerable downturn in revenue.