Policymakers should eliminate the capital gains tax

Arizona could be on the verge of strong economic growth. Right now the state House of Representatives is considering HB 2815 which, among other things, phases-out the capital gains tax over four years for 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.

Other states have drastically reduced their capital gains taxes and reaped the rewards. When our neighbor, New Mexico, dropped capital gains taxes to a lower rate than standard income tax rates, venture capital nearly quadrupled.

Between 2000 and 2007, states that had low capital gains taxes had job creation rates that were 35 percent higher on average than the states that tax capital gains at higher rates than ordinary income.

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 higher investment and ultimately, job creation.

If HB 2815 became law, it would establish Arizona as an investment hub. We estimate that it could increase investment in Arizona by $30 million in the first two years and create more than 3,000 new jobs by 2016.

Arizona can be the first state to completely eliminate the capital gains tax. It’s one of the most important first steps the legislature can take to set the state on a robust economic growth trajectory in the years ahead.

Learn more:

Goldwater Institute: Unleashing Entrepreneurial Forces

American Council for Capital Formation: Capital Gains Taxation and Entrepreneurship

Harvard University: What Drives Venture Capital Fundraising? (PDF)

American Action Forum: Employment Effects of Reducing Capital Gains Tax Rates in Ohio