JEFFERSON CITY, Mo. (AP) — Investors who realize gains from selling securities, property, and other assets could soon see an increased advantage in Missouri, as the state is set to become the first in the U.S. to exclude capital gains from its income tax.

Legislative measures given final consent on Wednesday are set to suspend the capital gains tax for individuals this year and could, in time, abolish it for corporations, contingent on sustained growth in state revenues. This tax repeal is now progressing to Republican Governor Mike Kehoe, who has voiced strong endorsement of the proposal.

Supporters believe repealing the capital gains tax could boost the economy, but critics argue it will mainly help the rich and reduce tax money for public schools and services. The Republican-controlled legislature finally overcame objections from Democrats by adding more tax breaks for older and disabled people and new sales tax exemptions for items like diapers and feminine hygiene products.

The unusual income tax exemption in Missouri coincides with Republican-dominated legislatures in at least eight other states having enacted more conventional income tax rate cuts this year, and also with Congress deliberating whether to extend and broaden income tax advantages implemented during President Donald Trump’s initial term.

Could you define what a capital gains tax entails?

Capital gains are the profits you make when you sell assets like stocks, cryptocurrency, or property. The federal government taxes these long-term capital gains, which are from assets owned for over a year, at a lower rate than regular income.

In the United States, states that levy income taxes typically also tax capital gains, with 32 states and the District of Columbia currently taxing these gains at the same rate as earned income, while eight states tax them at a reduced rate, according to data from the Tax Foundation.

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 capital gains for people earning over $350,000. Washington also recently passed a law to add another 2.9% tax on capital gains over $1 million. Minnesota already has an extra tax on capital gains and other investment money over $1 million.

What arguments support the abolition of capital gains tax?

People who support getting rid of the capital gains tax argue that it makes people less likely to invest and encourages them to keep assets instead of selling them and using the money in other parts of the economy.

"Imposing taxes on something typically results in a reduction of its quantity," stated Jonathan Williams, president and chief economist at the American Legislative Exchange Council, an association comprising conservative legislators and businesses. "The underlying principle is, naturally, to foster increased 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 who were paying a lot of this tax. He also said his proposed law could help family farmers who want to sell their land.

Republican state Senator Curtis Trent, who supported the bill in the Senate, said that the capital gains tax causes "lost economic chances, financial problems, and lower wages." He added that these issues make Missouri less competitive in the country and around the world.

To whom would the tax repeal be advantageous?

Critics argue the most affluent stand to benefit disproportionately.

Abolishing Missouri's capital gains tax would establish "a concerning precedent" nationwide and "exacerbate economic and racial disparities," according to Sam Waxman, the deputy director of state policy research at the liberal-leaning Center on Budget and Policy Priorities.

A government study revealed a higher propensity for white families to report capital gains compared to certain minority groups. Within the middle-income bracket, approximately 8% of white families benefited from federal tax rates on capital gains and dividends, significantly exceeding the 3% of Black families and 1% of Hispanic families, according to a 2023 U.S. Treasury Department report.

In Missouri, approximately 542,000 individual income taxpayers declared capital gains in 2022, representing a mere fifth of all filers, according to the Missouri Budget Project, a non-profit research organisation opposing the repeal of the capital gains tax. The organisation anticipates that four-fifths of the tax reduction would benefit the most affluent 5% of taxpayers.

What would be the financial implications of repealing 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 upon full enactment, a figure contested by both advocates and detractors.

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

Trent believes getting rid of the tax will lead to "more economic growth that will bring in more tax money" over time.

Owen Zidar, a professor of economics and public affairs at Princeton University, researched the effects of 584 alterations to capital gains tax rates in various states across four decades. He noted that reductions in capital gains taxes typically encourage a greater number of individuals to sell assets for profit, but this increase in activity is insufficient to recoup the forfeited tax revenue.

Zidar expressed doubt regarding assertions that repealing Missouri’s capital gains tax would significantly stimulate investment and economic activity.

He anticipated a considerable drop in revenue.