| Sigh. Another day, another ridiculous idea.
Mike Dennison reports via Twitter: GOP proposes capital gains tax cut to attract new businesses to Montana Yargh! Capital gains taxes don't depend on where the investment is made, but where the investor lives.
In other words, you cut capital gains taxes in Montana and Montanans invest...wherever the hell they want.
Second problem -- and I'm not entirely clear how this plays in Montana -- but federal income taxes generally make state taxes deductible, partially or wholly. So we cut capital gains taxes in Montana, Dennis Washington invests in New York, pays lower state taxes but higher federal taxes.
Third problem -- most investment is not driven by tax rates but by perceived success or failure of a business. The idea that huge numbers of people are scared out of investing because they'll pay a tax if the venture is successful is ludicrous.
Don't just take it from me, take it from the Institute on Taxation and Economic Policy's Issue Brief on the subject: Advocates of capital gains tax cuts make no bones about the fact that working taxpayers receive very little benefit from such cuts. They argue that capital gains breaks are designed to encourage economic development by rewarding investment. But there are reasons to believe that capital gains tax breaks are an ineffective strategy for achieving state economic development.
First, capital gains tax breaks have not been shown to encourage additional investment on the federal level-and this linkage is even more tenuous at the state level. A general state capital gains tax break is highly unlikely to benefit that state's economy, since any new investment encouraged by the capital gains break could take place anywhere in the United States or the world.
Second, a substantial part of any state capital gains tax break will never find its way to the pockets of state residents. Because state income taxes can be written off on federal tax forms by those taxpayers who itemize their federal income taxes, and because the ability to write off state income taxes is most valuable for the wealthy Americans who realize most capital gains income, any reduction in state capital gains taxes will be partially offset by an increase in federal income tax liability. For example, ITEP has estimated that 25 percent of the state revenue losses from the Arkansas capital gains tax deduction are directly offset by federal tax increases, and that this "federal offset" increases to 34 percent for the wealthiest taxpayers.
Few policy makers would seriously propose an economic development program that simply threw away 25 percent of its allocated budget-yet that is essentially what lawmakers are doing when they propose a capital gains tax break.
Update -- Wow. Must have been in a hurry yesterday, I called Mr. Dennison, "Mike Dennis." My bad.
Charles Johnson has a story this morning fleshing out more of the details. The tax break is apparently aimed at capital gains tax cuts for new businesses starting or moving to Montana in the next three years. I'm not sure exactly how you do that on the personal income tax side of things instead of the corporate income tax side of things, but apparently this works.
This takes care of one in three of my concerns, but doesn't do anything to address the federal deductibility issue or the fact that capital gains tax cuts just haven't ever been shown to have a stimulative impact. |
