JEFFERSON CITY, Mo. (AP) — Investors who realise profits from the sale of stocks, property, and other assets may soon enjoy an even more substantial advantage in Missouri, which is set to become the inaugural U.S. state to exclude capital gains from income taxation.

Legislation granted final approval on Wednesday is set to suspend the capital gains tax for individuals this year and may ultimately abolish it for corporations, contingent on continued state revenue growth.

While supporters hope it will boost the economy, opponents argue that removing the capital gains tax will mostly help rich people and mean less tax money for public schools and services. The Republican-controlled government managed to get past the Democrats' objections only after adding more tax breaks for older people and disabled residents, and new sales tax exemptions 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 made the usual income tax cuts this year. It also comes as Congress is thinking about whether to continue and increase income tax benefits that were put in place during President Donald Trump's first time in office.

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

Capital gains represent the earnings derived from the disposition of assets like equities, digital currencies, or real estate. The national government levies taxes on long-term capital gains, which pertain to assets retained for over a year, at a reduced percentage compared to standard earnings.

All states that tax income also tax capital gains. Missouri is one of 32 states and the District of Columbia that tax capital gains at the same rate as wages and other income, according to the Tax Foundation. Eight states tax capital gains at a lower rate than other income.

On the other hand, some states led by Democrats are doing the opposite. For example, last month, lawmakers in Maryland passed a law that adds a 2% tax on capital gains for people earning 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 adds an extra charge on capital gains and other money from investments over $1 million.

What arguments support the abolition of the capital gains tax?

Those advocating for the elimination of the capital gains tax argue that it hinders investment and encourages individuals to retain assets rather than divesting and circulating funds within the economy.

"Taxing an activity typically leads to a reduction in its occurrence," stated Jonathan Williams, president and chief economist at the American Legislative Exchange Council, a body comprising conservative legislators and commercial entities. "Naturally, the objective is to foster greater capital expenditure within your state."

Despite ALEC's enduring support for repealing state capital gains taxes, Missouri House Speaker Pro Tem Chad Perkins stated the concept originated last year from acquaintances at an employee-owned construction firm burdened by the levy. He added his proposed law could also assist family farmers intending to divest their property.

Republican state Senator Curtis Trent, who was in charge of the bill in the Senate, said that the capital gains tax leads to "missed economic chances, financial problems, and lower pay - all of which make Missouri less able to compete in the US and around the world."

Who stands to gain from the tax repeal?

Critics argue 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 country and "make economic and racial differences worse."

A government study indicated that white households are more inclined to declare capital gains than certain minority groups, with a 2023 U.S. Treasury Department report revealing 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.

In Missouri, approximately 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 organization that opposes the abolition of the capital gains tax. The organization estimates that 80% of the proposed tax relief would disproportionately benefit the wealthiest 5% of taxpayers.

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

Legislative researchers estimate that getting rid of Missouri's capital gains tax could cost the state around $262 million each year when it's completely in effect. However, both those who support and those who oppose the change disagree with this number.

According to 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 gradually increase tax money."

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

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.

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