WHY RHODE ISLAND NEEDS THE CAPITAL GAINS TAX:

Capital gains taxes are important to Rhode Island 's economy because they:

•  Provide a permanent, sustainable revenue stream.

•  Maintain fairness in our tax structure by taxing capital gains income just as we tax income from salaries and wages.

•  Support state investments in proven public programs that allow Rhode Islanders to work, learn and stay well.

•  Are a mechanism to recoup revenue from out of state residents that sell real estate in Rhode Island . The Division of Taxation estimates that a significant portion of capital gains revenue was raised last year from out of state residents.

In 2002, largely to remain competitive with Massachusetts , the Rhode Island General Assembly enacted legislation to eliminate the 5% tax on capital gains. The change dropped the capital gains tax to 1.7% in tax year 2007 and completely eliminated it for tax year 2008.

HB 5809 is not a tax increase. This legislation simply prevents an unaffordable cut in revenue.

How Much Revenue Will Be Lost?

We will lose approximately $50 million a year if we end the tax on capital gains, according to estimates by the May 2007 Revenue Estimating Conference and data from the Internal Revenue Service.

If we continue forward with the 2002 changes to our capital gains rate, we will:

•  Forgo $17.5 million in FY2008 revenue

•  Forgo $52 million in FY2009 revenue . [1]

If we stop the elimination of capital gains and restore it to 5%, Rhode Island will maintain as much as $69 million in revenue over the next two fiscal years.

What Do Neighboring States Do?

Massachusetts taxes long-term capital gains at 5.3% and short-term capital gains at 12%.

According to the Massachusetts Budget and Policy Center , the state passed its capital gains tax cut in 1994. Enacted in 1996, this change continued to tax short-term capital gains at 12%, but eliminated the tax for capital gains income earned on investments held for six years or longer. Massachusetts reinstated their capital gains tax during the budget debate of 2002 due to a deep deficit. After a court decision, the change was enacted retroactively starting on January 1 st of 2002. [2]

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What Are Capital Gains?

Capital gains are income from the profits on the sale of certain assets like stocks, bonds, real estate and antiques. Income tax on capital gains is paid only when it is sold, not while the value is accruing.

There are already many important exceptions for capital gains that protect middle class and low-income individuals, such as exemptions for profits made from selling a primary residence. For a single owner, profits up to $250,000 are exempt from the tax. For a couple filing jointly, the tax applies to income on profits exceeding $500,000.

Who Pays Capital Gains Taxes?

According to the Institute on Taxation and Economic Policy, in 2003 only 15% of Americans reported capital gains income. [3] In Rhode Island , 78% of all capital gains income was received by taxpayers earning more than $200,000 in income. [4]

It is simply a myth that many middle class Rhode Islanders pay capital gains taxes. The table below shows who reports capital gains and how much profit each income bracket makes from their capital investments.

Table 1. Rhode Island Capital Gains by Income Category, Tax Year 2003 [5]

[1] Poverty Institute, “Tax Facts: The Other Side of the Ledger,” Volume 2, Issue 6, January 2007.

[2] Massachusetts Budget and Policy Center , “Tax Cuts of the 1990s,” www.massbudget.org/taxcuts_90s.pdf.

[3] Institute on Taxation and Economic Policy, “State Capital Gains Tax Cuts and Economic Development,” Policy Brief #13, 2005.

[4] Poverty Institute, “Tax Facts: The Other Side of the Ledger,” Volume 2, Issue 6, January 2007.

[5] Internal Revenue Service, Statistics for Income for Tax Year 2003 and Poverty Institute calculations, http://www.povertyinstitute.org/matriarch/documents/CapGains_composite2.pdf.