Download Capital Gains Tax Relief

Capital Gains Tax Relief
Recommendation: Reduce taxes on capital gains.
Recommended Appropriation: No appropriation; fiscal impact to be determined.
Overview: Exclude all or a portion of capital gains from state taxable personal income. Alternatively,
establish a lower state personal income tax rate for capital gains. Relief can be made broadly applicable,
or targeted to investments in in-state or innovation-based companies.
States with Similar Programs: AR, IA, MT, NB, NH, ND, NM, OK, SC, TN, UT, VT WI. In addition, the
following states impose no tax on any form of personal income: AK, FL, NV, SD, TX, WA, WY.
Rationale: North Carolina’s life science community depends heavily on capital investment; yet our
state trails other major life science states in access to capital. By lowering the personal income tax rate
on capital gains, North Carolina would encourage individuals to invest in growing companies; remove or
reduce the current tax code’s incentive for successful investors to leave the State; and dampen the
impact of economic cycles on state tax collections.
Discussion: Nineteen states impose no tax or reduced taxes on capital gains earned by individuals.
Since 2003, the federal government has capped the capital gains rate for individuals at 15% -- less than
half the top marginal rate for ordinary income. These policies encourage individuals to invest savings
and discretionary income in growing companies that will create new jobs in the economy.
North Carolina currently taxes capital gains at the same rate as ordinary income – thereby providing no
incentive for individuals to invest in growing our economy. In fact, by taxing capital gains at a rate
higher than many surrounding states, North Carolina actually encourages investors to relocate to lower
tax jurisdictions whenever successful investments mature. In addition, because capital gains often
increase during periods of economic expansion (and decrease during economic downturns), North
Carolina’s high capital gains tax rate amplifies peaks and troughs in state revenues associated with
cycles of the economy.
Capital gains tax relief can be implemented narrowly or broadly. Many states, for example, target
capital gains tax reductions to investments in in-state companies. Capital gains tax relief can encourage
“patient” capital (as opposed to more speculative trading of assets) by targeting reductions to longer
term investments.
North Carolina ranks only 14th in the nation in venture capital investments as a percentage of gross state
product. In absolute dollars, North Carolina companies receive only one-twentieth the amount of
venture capital investments as California, the nation’s top venture investment location.
Properly structured capital gains tax relief can be expected to materially improve life science companies’
access capital in North Carolina. Capital gains tax reductions would be particularly meaningful to our life
science sector if targeted to long-term investments in in-state companies. Targeted capital gains tax
relief could be implemented with less impact on state revenue collections.
For more information, contact Samuel Taylor, President, North Carolina Biosciences Organization
P.O. Box 14354, Research Triangle Park, NC 27709, (919) 281-8960, [email protected]
Capital Gains Tax Exclusions
(Oct-12)
State
Ordinary
Income
Rate
Alaska
0.00%
No personal income tax.
Arkansas
7.00%
Exclusion from personal income tax for 100% of net capital gains
from venture capital investments held in Arkansas companies held
for at least five (5) years. Exclusion for 30% of other net capital gains
on investments held for more than 12 months.
Florida
0.00%
No personal income tax.
Iowa
8.98%
Exclusion from individual income tax for 100% net capital gains on
sale of substantially all of the assets of business, including stock sales
treated as asset sales, held by an owner who has materially
participated in the business for at least 10 years.
Montana
6.90%
Exclusion from personal and corporate income tax for 100% of net
capital gains on investments in federally qualifying Small Business
Investment Corporations.
Nebraska
6.84%
Once-in-a-lifetime exclusion from personal income tax for 100% of
net capital gains from sale of stock in a corporation acquired because
of employment at company doing business in Nebraska for at least 3
years.
Nevada
0.00%
No personal or corporate income tax.
New Hampshire
5.00%
Personal income tax applies to dividends and interest only.
New Mexico
4.90%
Exclusion from pesonal income tax for the greater of 50% or $1,000
of net capital gains.
North Dakota
3.90%
Exclusion from personal income tax for 30% of net capital gains on
investments held for one year or more
Oklahoma
5.25%
Exclusion from personal and corporate income tax for net gains from
sale of stock ownership interest in an Oklahoma-headquartered
company, limited liability company, or partnership if the stock or
interest was owned for at least two uniterrupted years prior to sale.
South Carolina
7.00%
Exclusion from personal income tax for 44% of net capital gains on
investments held for two years or more.
South Dakota
0.00%
No personal or corporate income tax.
Notes
Capital Gains Tax Exclusions
(Oct-12)
State
Ordinary
Income
Rate
Tennessee
6.00%
Personal income tax applies to dividends and interest only.
Texas
0.00%
No personal or corporate income tax.
Utah
5.00%
Credit against personal income tax for 5% of net capital gains if 70%
are reinvested in qualifying Utah small business.
Vermont
8.95%
Exclusion from personal income tax for 40% of net capital gains from
the sale of non-publicly traded stocks held for three years or more.
Washington
0.00%
No personal or corporate income tax.
Wisconsin
6.75%
Exclusions from personal income tax for: (1) 30% of net capital gains
on investments held for one year or more; (2) 100% of net capital
gains on investments in qualifying small businesses held for five
years or more; deferral of personal income tax on 100% of long term
capital gains reinvested in qualifying Wisconsin business.
Wyoming
0.00%
No personal or corporate income tax.
Notes