New Special Report: Capital Gains Tax Hikes Could Adversely Impact Most State Budgets

WASHINGTON, April 16, 2012 /PRNewswire/ -- Most state budgets could be negatively impacted if lawmakers increase tax rates on capital gains, according to a new special report released today by the American Council for Capital Formation Center for Policy Research (ACCF CPR).  The new report State and Federal Individual Capital Gains Tax Rates: How High Could They Go? is introduced as congressional lawmakers debate the "Buffett Rule" and highlights the effect of increased federal tax rates on long-term individual capital gains tax rates when both the federal, state and, in some cases, local tax rates are combined. The report is based on survey data collected by Ernst & Young and concludes that higher federal rates, combined with state capital gains taxes, may reduce state's budget receipts as well as overall investment and job growth.

"On the surface the Buffett Rule may appear to only target wealthy Americans, but in reality higher tax rates may actually reduce tax receipts for multiple U.S. states, many of which receive significant portions of their taxable income from long-term capital gains," ACCF Senior Vice President and Chief Economist Margo Thorning said.  "This could stunt growth in many states that are just now showing early signs of economic rebound."

The ACCF CPR report examined three scenarios (before a potential Buffett Rule is enacted into law affecting investors and entrepreneurs): first, the current 2012 rates; second, the current federal capital gains rate of 15 percent along with the 3.8 percent Medicare surcharge on filers making $200,000 and above individually or 250,000 and above as a couple; and third, the increased capital gains rate of 20 percent along with the Medicare surcharge.

Under the third and entirely plausible scenario, Californians and Hawaiians will pay more than 31 percent of their long term capital gains directly to various governments, with 39 other states feeling various forms of pain, including Vermont, Maine, and D.C. residents, who will pay 30 percent. If congressional leaders enact a 30 percent tax rate on all income over $1 million is enacted, the combined federal and state tax capital gains tax rate will rise even further.

Recent research by Dr. Allen Sinai has already predicted a decrease in jobs simply from moving from the current 15 percent tax rate on long-term capital gains to 20 percent. Real economic growth falls by an average of 0.05 percentage points and jobs will decline by an average of 231,000 per year.

A hike in the federal rate will be bad for states and those trying to govern them, as well—especially in those areas that rely on individual capital gains taxes to pay for services. The ACCF report shows, for instance, that in 2009 four states (Georgia, Virginia, Pennsylvania, New Jersey) counted on such taxes for 3 percent of their taxable income, three states (California, Massachusetts, Illinois) tallied 4 percent, and one each at 5 percent (Connecticut), and 6 percent (Colorado).

"These consequences should not be taken lightly," Thorning said.  "Investment is a key factor in creating and growing jobs. In recent years each $1 billion increase in investment is associated with an additional 15,000 jobs. Individuals and firms will be less likely to take risks and invest in a harsher tax environment which will result in a direct impediment to entrepreneurship and economic growth."

Download the New ACCF Center for Policy Research Study:
State and Federal Individual Capital Gains Tax Rates: How High Could They Go?

Founded in 1973, The American Council for Capital Formation (www.accf.org) is a nonprofit, nonpartisan economic policy organization dedicated to the advocacy of tax, energy, environmental and regulatory policies that encourage saving and investment.

SOURCE American Council for Capital Formation