Idaho’s high Capital Gains tax is the problem!
Traditionally, Idaho has been one of the most economically and socially conservative states in the country. It is currently ranked as the seventh freest state in the nation by the CATO Institute. It has attracted substantial out-migration from other states due its quality of life and conservative values.
However, are Idahoans truly economically free? Not if they want to sell a business or invest in a business. Not if they are a senior citizen relying on investment income outside of social security benefits. Why? Because Idaho has the tenth highest capital gains tax rates in the country and ranks 16th highest in the industrial world. Idahoans that invest and save are being unfairly penalized due to this higher than average capital gains rate. How does this fit with our conservative values? Is it fair to Idahoans?
The capital gains tax was enacted in Idaho in 1987 and is a tax on capital gains net income taxed at the personal income tax rate. However, Idaho has a special capital gains deduction for certain segments of the economy. Specifically, there is a 60% deduction on capital gains net income from the sale or exchange of Idaho real property, cattle and horses, livestock used for breeding and timber. This is great benefit for traditional industries with deep roots in Idaho such as ranching and farming.
However, our economic landscape is continuing to change with key industries such as technology, manufacturing and aerospace emerging as important factors in our economy. Another important component of our economy is the growth of small businesses which employ 55.4% of the private workforce.
- States across the country are actively reducing taxes on capital. Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington and Wyoming have no state Capital Gains tax. Arkansas, New York, Mississippi and Tennessee are currently in the process of decreasing their tax on Capital Gains.
- The Idaho Capital Gains tax currently ranks 16th highest in the industrial world.
- Per the Organization for Economic Cooperation and Development (OECD), taxes on Capital Gains and Income are the most damaging to economic growth.
- Per a recent Gallup poll, more than 50% of middle-class Americans invest in the stock market. States where the Capital Gains tax is reduced or eliminated have experienced a positive outcome for this portion of the state’s population.
- States with high Capital Gains taxes tend to penalize their senior residents.
- Historically, states with the highest in-migration rates in the country that raise tax rates, see growth reversed and the state economy stagnate.
- A decrease or elimination of tax on capital results in a stimulated economy, additional jobs and higher wages.
- The duplication of taxes on capital generally dissuades middle-class Idahoans from saving money.
- Twenty-three out of twenty-six independent studies conducted since 1983 conclude that taxes on income and capital have a negative impact on growth. The remaining 3 studies conclude that the impact is negligible.
What to Ask...
What should you be asking your state legislator?
- How can state government provide immediate tax relief to more than 50% of Idaho citizens?
- Should Idaho be competitive with surrounding states like Nevada, Wyoming, Washington and Utah in attracting new businesses and investment?
- Should Idaho keep a Capital Gains tax that creates a bias against savings, slows economic growth and creates a competitive disadvantage?
- States with high Capital Gains tax rates are seeing corporations relocate to states with more progressive structures in place. Do we want to see economic development occur here in Idaho?
- Do we want business owners to move out of state prior to selling their companies, or should the tax revenue remain here in Idaho?
- More than 50% of the middle-class population in Idaho invests in the stock market. Do we want them to move out of state prior to selling off all or part of their investment portfolio?
- Should seniors, business owners and Idaho’s middle-class be provided with the same Capital Gains tax benefits as farmers and ranchers? Isn’t it time to level the playing field?
Farmers and ranchers in Idaho can spend their lives building up an agricultural business, and sell the land at a preferred tax rate. Another entrepreneur can spend his entire life building a business, but when it’s time to sell, he is forced to pay over twice as much the as the rancher or farmer – unless he moves to a neighboring state prior to the sale. This is not only unjust, it is quite simply, wrong…
Q. Only the wealthy pay Capital Gains tax, so why should I care?
A. Current law is actually a punitive tax on seniors, entrepreneurs, business owners and the middle-class who are also burdened with this tax.
Q. Doesn’t the Idaho state government depend on the revenue generated by the Capital Gains tax?
A. No. In fact, by our estimates, the revenue generated by the Capital Gains tax makes up less than 2% of the total Idaho state budget.
Q. Won’t Idaho have to raise taxes in other areas to compensate for the loss of revenue as a result of the proposed reduction?
A. No. The fact of the matter is that in other states that have reduced (or eliminated) the Capital Gains tax, revenues have actually increased due to the resultant economic growth.
Q. Wouldn’t there be less money available for higher teacher pay and other important civic endeavors if we reduce the tax?
A. No, this is a commonly held misconception. In actuality, the proposed reduction in the Capital Gains tax will spur investment, having a positive impact on Idaho’s economy, thus increasing tax revenue.
Q. Overall, aren’t taxes in Idaho the 48th lowest in the nation?
A. Don’t be fooled. This study is based upon “per-capita” vs. the total number of taxpayers in Idaho.