This year, Arizona policymakers have a chance to do something that no other state with an income tax has done: eliminate the tax on capital gains.
Arizona, like most states with an income tax, treats capital gains as “ordinary” income and taxes it at the same rate as all other income. But eight states – Arkansas, Hawaii, New Mexico, North Dakota, Montana, South Carolina, Vermont, and Wisconsin – currently tax returns from investment at a lower rate than their standard income tax rates.
Taxation of capital gains is, among other things, a tax on entrepreneurship. Businesses – new businesses especially – need investment to flourish. States that have lowered their taxes on capital gains have seen an increase in investment which precipitated an increase in entrepreneurial activity and the job creation that accompanies it.
The Arizona legislature has before it a number of bills that would either phase-out or terminate next year the taxation of capital gains on assets purchased in 2012 and after. The governor has declared that she is interested in signing a bill that cuts taxes on capital gain income.
State policymakers can set the stage to make Arizona a national hub for new investment. The best way to do this is to immediately eliminate taxation of capital gains or phase it out as quickly as possible.
This memo outlines the case in favor or eliminating capital gains taxes and outlines how our neighbor, New Mexico, has experienced a venture capital investment boom as a result of cutting their capital gains tax. It also compares the economic impact of capital gains tax elimination to some tax reforms that have already been enacted in Arizona.