Lawmakers want to eliminate state income tax on capital gains
PHOENIX -- Saying "job creators" need some more incentive, Arizona lawmakers took the first steps Monday to reducing -- and in some cases eliminating entirely -- any state income tax on capital gains.
On a party-line vote, members of the House Ways and Means Committee voted to say that the wealthiest -- those with individual income of $50,000 or $100,000 for couples -- would pay taxes on only 43 percent of anything they made from selling off future investments.
That number is not coincidental. Garrick Taylor, lobbyist for the Arizona Chamber of Commerce and Industry, said it reflects federal law, where the top rate on regular income is 35 percent; the rate is 15 percent -- or 57 percent less -- for capital gains held more than a year.
Those earning less than that $50,000/$100,000 figure would owe no taxes on capital gains.
By the same margin, the committee approved two other more far-reaching measures, both of which would go farther than the federal law. They would make future capital gains tax exempt, though their approaches differ slightly.
All three measures now go to the full House.
The moves come amid a rising national debate over the favorable treatment given capital gains at the federal level.
These were brought to light largely after Republican presidential contender Mitt Romney released his tax returns which showed he paid an effective tax rate of just 13.9 percent, a rate below what is owed by people with jobs. That is because his income is largely from investments.
Steve Slivinski, an economist from the Goldwater Institute, said nine states already impose a lower tax rate on capital gains than on regular income. He said the experience in New Mexico which lowered its capital gains tax shows it can produce venture capital to promote growth.
Rep. Steve Farley, D-Tucson, said the problem is that the state cannot afford the loss of revenues, at least not right now.
He said legislative budget analysts, looking at a similar bill last year, said that even phasing out the levy, when fully implemented, would cut tax collections by more than $420 million a year.
"That's almost our entire surplus for this year alone,' Farley said.
He said that also ignores that the state has a surplus because voters approved a temporary hike in what they pay in state sales taxes, because people kicked out of their homes in foreclosures cannot deduct mortgage interest payments on their tax forms, and the Legislature cut funding for schools.
"So we're taking the money away from kids, from foreclosed homeowners and we're giving it, in effect, to millionaires,' Farley said.
But Rep. Justin Olson, R-Mesa, said encouraging investment is exactly what's needed to prevent another economic collapse in Arizona.
"If you put people to work and grow your businesses, then you earn and profit and you sell that business or your sell an interest in that business, that is a capital gain,' he said. "So everybody benefits when you reduce the discouragements we now have on investing in our economy.'
Rep. Ted Vogt, R-Tucson, agreed.
"Anything we can do to invest in the state of Arizona is good,' he said. Vogt also said that encouraging investment will help prevent the kind of "lopsided economy' Arizona had which was "way too dependent on growth for growth's sake.'
Farley, however, said the flaw in the argument is that the legislation does not limit the lower tax rates on money invested in Arizona companies.
"The capital gains tax is (on) any type of capital that has a gain,' he said.
"And that includes jewelry, that includes yachts, it includes Swiss chalets, it includes anything that you may buy as an investment,' Farley continued. "None of that is going to help the Arizona economy.'
Olson said that reducing or eliminating capital gains is not a special tax break.
He said any business already pays income tax on its profits. Then when investors sell that stock or interest, they are paying taxes again.