People who make money from selling things like stocks and houses might soon pay less tax in Missouri, as it plans to be the first US state not to tax this kind of income.

A new law passed on Wednesday would stop the tax on profits from selling things this year for individuals and might get rid of it for companies, if the state's income continues to rise. The plan to end the tax will now go to the Republican Governor, Mike Kehoe, who said he strongly supports it.

Supporters hope the tax change will help the economy, but critics say that removing the tax on investments will mainly help rich people and mean less money for schools and public services. The Republican government passed the change despite Democrats being against it, but only after adding more tax benefits for older and disabled people and removing sales tax from nappies and period products.

Missouri has a special rule for income tax. Meanwhile, in at least eight other states, Republican leaders have just lowered their income tax rates this year. Also, the US Congress is thinking about continuing and increasing the income tax cuts that were put in place during Donald Trump's first time as president.

What is the tax you pay when you sell something for more than you bought it?

Capital gains are the money you make when you sell things like stocks or property for more than you paid. If you keep these things for over a year before selling, the government taxes this money at a lower rate than your normal income.

In the US, states that tax income usually also tax the money you make from selling things like stocks or property. According to the Tax Foundation, Missouri is one of 32 states and Washington D.C. that tax this money at the same rate as your salary. Eight other states tax it at a lower rate.

Some states led by Democrats are doing the opposite. For example, politicians in Maryland recently agreed on a new law. This law would add a 2% tax on investment profits for people earning more than $350,000. Also, politicians in Washington recently passed a law adding an extra 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.

Why should we stop taxing the profit people make when they sell things like property or company shares?

People who support removing the tax on profits from selling assets argue that this tax discourages investment. They also claim it encourages people to keep their assets instead of selling them and spending the money in other areas of the economy.

Jonathan Williams, from the American Legislative Exchange Council, said that when you tax something, people usually do less of it. He also said that states want to get more investment.

ALEC has supported removing state taxes on investments for a long time. However, Missouri House Speaker Pro Tem Chad Perkins said he got the idea last year from friends at a construction company owned by its employees who were affected by the tax. He added that his proposed law could also help family farmers who wish to sell their land.

Republican state Senator Curtis Trent said the tax on capital gains causes "lost economic chances, financial problems, and lower pay." He thinks this makes Missouri less competitive in the US and other countries.

Who would get something good from removing the tax?

People who disagree say rich people will benefit the most.

Sam Waxman, from the Center on Budget and Policy Priorities, said that getting rid of the tax on money made from investments in Missouri could be a bad example for other states and would make economic and racial inequality worse.

A government study found that white families report making money from selling assets more often than some minority groups. Among middle-income taxpayers, about 8% of white families benefited from the government's tax rates on these earnings, compared to only 3% of Black families and 1% of Hispanic families, according to a 2023 report.

In Missouri, around 542,000 people who pay income tax made money from investments in 2022. This was only one-fifth of all taxpayers. This information comes from the Missouri Budget Project, a group that studies money matters and is against getting rid of the tax on investment profits. The group thinks that 80% of the tax savings would help the wealthiest 5% of taxpayers.

How much money would be lost if the tax on profits from selling assets was removed?

People who study laws think that if Missouri stops taxing the money made from selling things like property, the state could lose about $262 million every year when the change is fully working. But both people who support it and those against it disagree with this number.

The Missouri Budget Project thinks the cost might be almost $600 million each year.

Trent believes removing the tax will lead to "more economic growth, which will result in more tax money" over time.

Owen Zidar, a professor at Princeton University, looked at how changing taxes on profits from selling things like stocks or property affected states over 40 years. He found that when these taxes were cut, more people sold assets for a profit. However, the government still lost tax money because the tax rate was lower.

Zidar said he is not sure if getting rid of Missouri's tax on money made from investments will really bring in a lot of new business and economic activity.

"I think we will see a big drop in how much money we make," he said.