Capital Gains Tax Cuts Cost Much, Benefit Few
Despite widespread concerns over falling revenues and significant cuts in education, health care, and other areas, the budget passed last week by the Assembly and Senate contains a number of new or expanded tax breaks, at a cost of more than $90 million over the biennium and $1.6 billion over the next 10 years. Two of these tax breaks are targeted to benefit Wisconsin investors by reducing taxes on capital gains (i.e., the profits resulting from the sale of stock, businesses, real estate, or other assets). These tax breaks recently received attention from the Capital Times’ Mike Ivey, who wrote about the tenuous connection between these tax breaks and increased economic growth in Wisconsin, as well as the regressivity of these new tax cuts.
This blog post describes the two capital gains tax breaks that were just approved by the Legislature and two other pieces of legislation that would also increase the preference given to income generated by investments, relative to income from one’s own labor. In addition, it summarizes data released by the Fiscal Bureau during the budget process, showing the distribution of the benefits for capital gains tax breaks.
The first investor tax break provides a deferral on capital gains taxes if the profits are reinvested in Wisconsin businesses. Under this provision, investors can sell off assets and reinvest the proceeds without being taxed on income from profits. Investors would only have to pay taxes on these profits after the new, Wisconsin-based assets are sold. The cost of this provision is $36.3 million over the next two years and $197.9 million over the next 10 years.
Under the second tax break, investors would pay no state taxes on profits resulting from the sale of Wisconsin assets if purchased in 2011 or later and held for at least five years. Because of the five-year holding rule, this provision would not cost taxpayers until fiscal year 2017, when the state would lose $6 million in revenue. The full price-tag of this provision will come into effect in fiscal year 2021, when it is expected to cost $79.4 million annually.
We can predict who would take advantage of these new tax breaks by seeing who benefits from similar tax breaks that already exist. Under current Wisconsin tax law, 30% of capital gains are exempt from taxation (60% in the case of farm assets). The chart below, based on our analysis of data from the Wisconsin Department of Revenue and Legislative Fiscal Bureau, shows how much individuals of different income levels take advantage of the current exclusion on capital gains.
- Those making $200,000 or more make up less than 2% of all tax filers, but account for more than 46% of all profits excluded from taxes.
- Those making $90,000 or less – 88% of all tax filers – account for only 36% of all excluded profits.
Senator Randy Hopper, R-Fond du Lac, and Representative Mike Kuglitsch, R-New Berlin, have introduced legislation that would go a step further, increasing the capital gains exclusion from 30% under current law to 60% in tax year 2012, 80% in tax year 2013, and 100% in 2014 and beyond, at a cost of more than $400 million over the next three years.
These tax breaks for the wealthiest are being advanced as the tax burden for working families is being raised, through reductions in the Earned Income Tax Credit and the Homestead Tax Credit. And while there is clear need for economic growth in Wisconsin and nationwide, a previous Wisconsin Budget Project post highlighted a report that found reductions in capital gains taxes are “not an effective means of promoting economic growth.”
We’ll continue to monitor the capital gains proposals as the legislative session continues.