Governors who met last week with President Obama are right to worry about state budget impacts if a fiscal cliff agreement doesn't take place. The impacts of mandatory federal budget cuts and automatic tax hikes will be felt in multiple states, including Oklahoma. More acutely, investors and job creators will feel pain if tax rates on capital gains rise.
Investors already face high combined federal and state tax rates on capital gains. An analysis conducted by Ernst & Young shows that investors currently face state-level capital gains taxes in 41 states with an average top individual capital gains tax rate on corporate equities of 5.7 percent in 2012. Combined with the federal rate, these taxes substantially increase the separation between what an investment yields and what an individual actually receives — known as the “tax wedge.”
The higher the tax wedge, the fewer investments that will be worth an investor's time and risk, resulting ultimately in fewer investments being undertaken and longer holding periods as investors delay selling assets. Both of those outcomes will further pressure tax receipts for state budgets, many of which rely on capital gains taxes as a significant portion, some as high as 3-7 percent, of budget receipts and stand to lose millions of dollars because of such decreased investment.
Obama and Congress should address the short-term fiscal cliff, but not at the expense of the long-term tax provisions that will generate growth and jobs for our economy.
Pinar Cebi Wilber, Washington, D.C.
Wilber is senior economist at the American Council for Capital Formation.