Lawmakers in Connecticut, Minnesota, and Vermont are considering raising taxes on capital gains —profits from selling an asset that has gained value, such as stock, real estate, or artwork — while New Mexico this year scaled back a tax break for capital gains. Historically, wealthy (mainly white) individuals used their political power to shape state tax policies in ways that largely benefit them and their families; reforms like these can reduce wealth concentration and racial inequality and expand equality of opportunity.
Because wealth is highly concentrated, so is capital gains income. Some 69 percent goes to the wealthiest 1 percent of taxpayers (see chart), and about 80 percent to the wealthiest 5 percent. Meanwhile, white families are three times likelier than families of color to be in the wealthiest 1 percent.
Most states tax capital gains income at the same rate as wage and salary income, but some states, including Vermont and New Mexico, provide special tax breaks. Among recent state actions on capital gains:
Opponents argue that strengthening capital gains taxes discourages investment and stifles economic growth. But history shows there’s no connection between capital gains tax rates and economic growth. That’s particularly true at the state level: the companies, bonds, and other assets generating capital gains for a state’s residents could be located anywhere in the country or world, so any economic benefit wouldn’t necessarily go to the state providing the tax break.
States looking to create broadly shared prosperity should increase capital gains taxes — including by eliminating any tax breaks for this type of income — to support public investments in education, infrastructure, and other priorities that benefit the state as a whole. They should also explore expanding taxes on other types of wealth, like high-value properties and estates.