NC Budget and Tax Center

Capital gains tax breaks won’t help economy, bypasses most North Carolinians

A new report released today by the Budget & Tax Center highlights how eliminating North Carolina’s taxes on capital gains would largely benefit those who need it least while making things worse for families struggling to make ends meet.

Some lawmakers and outside groups in North Carolina are pushing a plan that would benefit the wealthy at the expense of everyone else by ending state taxation of profits from selling artwork, vacation homes and other high-end items owned by relatively few North Carolinians. The proposal is part of a larger push to radically alter North Carolina’s tax structure to the detriment of the long-term well-being of the state and its residents.

Cap gains allocation

Key findings from the report include:

  • Eliminating capital gains from state income tax would reduce annual state revenue by $520 million, meaning even less revenue for public investments that help drive the state’s economy forward. This revenue loss would be in addition to the costly 2013 tax plan, which is projected to reduce state revenue by as much as $1.1 billion for the fiscal year that ends June 30.

  • Most taxpayers in North Carolina do not have capital gains as part of their income. Just one in seven taxpayers reported net capital gains on their tax return for tax year 2012 (the most recent year federal income tax data is available).
  • Capital gains are highly skewed toward the wealthiest of wealthy taxpayers and have steadily increased over time. In 1997, North Carolina taxpayers with adjusted gross income (AGI) of $1 million or more represented less than 1 percent of all North Carolina taxpayers and accounted for 33 percent of all net capital gains. By 2012, their share had nearly doubled, rising to 60 percent.
  • Cutting capital gains taxes is unlikely to boost North Carolina’s economy. There is no apparent cause-and-effect relationship between changes in the top capital gains tax rate and savings, investment, or productivity growth. Cuts in the federal capital gains rate have not promoted growth. Accordingly, capital gains tax breaks are unlikely to boost North Carolina’s economy.

At a time when so many families struggle to make ends meet and the state is cutting support for schools, higher education, and other essential job-creation tools, ensuring that the state’s tax system is fair and able to generate enough revenue for vial public investments is as important than ever. Now is the time to make sure North Carolina supports schools, community colleges and universities, and other important public services so that everyone has the chance to get ahead. State lawmakers should reject calls to eliminate or cut capital gains taxes and instead work to improve the state’s tax system so that it truly works for all North Carolinians.

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