Posted by Tara Manthey on December 15th 2010
Proposals to increase already generous tax break would also rob state revenues.
LITTLE ROCK - Cutting Arkansas' already generous capital gains taxes would benefit only the super wealthy, with three quarters of the tax break going to the top 1 percent of taxpayers, according to an analysis by Arkansas Advocates for Children and Families.
Taxpayers making more than $352,000 a year would pay on average $7,142 less per year in taxes if capital gains taxes were eliminated in Arkansas. That compares to a tax break of $2 per year for middle-income workers. AACF based the analysis on microsimulation tax models run on Arkansas taxpayer data in November by the Institute on Taxation and Economic Policy.
"Cutting capital gains taxes in Arkansas would benefit millionaires and do nothing to support our state economy," said Rich Huddleston, AACF Executive Director. "It could even hurt our economy because these wealthy individuals aren't likely to go spend that windfall locally on food, shelter and other basic necessities like average taxpayers would. They're going to re-invest it in stocks nationally or internationally. On top of that, Arkansas would lose millions in revenue for the education, transportation and health systems on which we all depend."
At least one bill filed in advance of the 2011 Arkansas General Assembly proposes to cut some capital gains taxes based on income from investments made in the state. House Bill 1002 would include a smaller subset of the overall capital gains taxes, but would still disproportionately benefit the wealthy, according to AACF's new report, "Millionaire's Gain: The Impact of Cutting Arkansas Capital Gains Taxes."
Under House Bill 1002, the top 1 percent of taxpayers would see an average tax cut of $4,220 a year. Middle class taxpayer would receive an average tax break of just $1 per year, showing how dramatically cutting capital gains benefits the super wealthy (see chart below). In Arkansas, the top 1 percent of wage earners includes just 13,000 tax filings.
Capital gains are profits from the sale of an asset, such as stocks, bonds, investments, vacation homes, art and other items when they are sold or liquidated. By exempting 30 percent of capital gains income from taxes, Arkansas is one of eight states among the 41 with income taxes that already offer generous tax breaks on capital gains, according to the Institute on Taxation and Economic Policy.
Lowest 20%: Less than $15,000
Second 20%: $15,000-$27,000
Middle 20%: $27,000-$45,000
Fourth 20%: $45,000-$71,000
Next 15%: $71,000-$139,000
Next 4%: $139,000-$352,000
Top 1%: $352,000 or more
More on the microsimulation tax model:
The estimates were developed by the Institute on Taxation and Economic Policy (ITEP). The ITEP Microsimulation Tax Model is capable of calculating the impact of current tax law and tax change proposals on taxpayers by income level. The model can also project potential revenue yields of tax law changes. The model is unique in its ability to produce analysis at the federal and state levels and to analyze income, consumption and property based taxes. The ITEP model's federal tax calculations are very similar to those produced by the Congressional Joint Committee on Taxation, the U.S. Treasury Department, and the Congressional Budget Office (although each of the four models differs as to how the results are presented). The ITEP model, however, adds state by state estimating capabilities not found in those government models.
In computing its estimates, the ITEP model relies on one of the largest databases of tax returns and supplementary data in existence, encompassing close to three quarters of a million records. To forecast revenues and incidence, the model relies on government or other widely respected economic projections. Click here for a full description of the model.