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BILL # HB 2528 |
TITLE: capital gains; income tax subtraction |
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SPONSOR: Mesnard |
STATUS: As Introduced |
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PREPARED BY: Jon Stall |
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Individual income taxpayers may currently subtract 25% of their net capital gains on assets purchased after tax year (TY) 2011 and held for at least 12 months (long-term capital gains). The bill would increase the subtraction of long-term capital gains for assets purchased after TY 2017 to 30% in TY 2018, 35% in TY 2019, 40% in TY 2020, 45% in TY 2021 and 50% in TY 2022 and later years.
Estimated Impact
The bill is estimated to reduce General Fund revenues by $(6.4) million in FY 2020, $(12.9) million in FY 2021, $(17.8) million in FY 2022 and $(23.2) million in FY 2023. The direct revenue loss associated with the bill would increase in later years as more assets acquired after 2017 are sold.
The first-year impact would not occur until FY 2020. Capital gains from assets purchased in 2018 and sold within 12 months are considered short-term gains and therefore would not qualify for the bill's 30% subtraction in FY 2019.
The bill may generate increased economic activity that would not occur absent the legislation. Any additional economic growth spurred by the bill’s tax provisions may have a “dynamic impact” in the sense of producing additional tax dollars for the state. The estimates in this analysis do not reflect such dynamic effects.
The Department of Revenue (DOR) estimates that the bill would reduce revenues by an unspecified amount.
The Internal Revenue Service (IRS) reports data on asset holding periods for capital gains included on federal tax returns. Asset holding periods can vary considerably over time. For example, the IRS reports that the proportion of all capital gains income earned from assets that were held between 1 and 2 years was 28.7% in TY 2010, 18.0% in TY 2011 and 7.1% in TY 2012. This analysis assumes that the proportion of Arizona capital gains income earned on assets held for a given length of time equals the average reported by the IRS on federal capital gains income from TY 2010 through TY 2012. For example, 17.9% (average of 28.7%, 18.0% and 7.1%) of Arizona capital gains are assumed to be earned on assets held between 1 and 2 years.
Taxpayers may not be able to identify and subtract all qualifying capital gains income. When mutual funds distribute capital gains income earned from sale of the fund’s assets, they do not report to investors the year in which the assets were initially purchased. As a result, taxpayers may not be able to identify and take a subtraction for the portion of mutual fund distributions that are earned on long-term assets purchased after 2017. IRS data indicates that 5.2% of net capital gains income consists of distributions from mutual funds. Based on that data, this analysis includes the assumption that 5.2% of Arizona long-term capital gains income is not subtracted due to unknown asset purchase dates.
Capital gains income earned by Arizona taxpayers are projected to increase from $9.3 billion in FY 2019 to $11.0 billion in FY 2023. Based on DOR data from TY 2014 to TY 2016, the average marginal tax rate of individuals with long-term capital gains income is projected to equal 3.8% in future years.
(Continued)
The bill would increase the available subtraction to 30% in FY 2019 for long-term capital gains earned on assets purchased after 2017. Gains from assets purchased in 2018 and sold within 12 months, though, would be considered short-term gains that would not be eligible for the 30% subtraction. As a result, the bill's 30% subtraction would not reduce revenues in FY 2019.
HB 2528 would further increase the subtraction to 35% in FY 2020 for long-term capital gains earned on assets purchased after 2017. Permitting the enhanced 35% subtraction for assets purchased after 2017 would reduce revenues by $(6.4) million in FY 2020. The subtraction under the bill would gradually increase to 50% by FY 2023. The estimated revenue impact for all years from FY 2019 to FY 2023 are summarized in Table 1. Those amounts are in addition to any revenue impact of the current 25% subtraction on assets purchased after 2011. The direct revenue loss associated with the bill would increase in later years as more assets acquired after 2017 are sold.
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Table 1
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Impact of Increasing the Subtraction on Assets Purchased after 2017 |
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FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
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Subtraction Rate |
30% |
35% |
40% |
45% |
50% |
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General Fund Revenue ($ in Millions) |
$ - |
$ (6.4) |
$ (12.9) |
$ (17.8) |
$ (23.2) |
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Local Government Impact
Each year, incorporated cities and towns receive 15% of income tax collections from 2 years prior. The bill would decrease local government distributions by $(1.0) million in FY 2022, $(1.9) million in FY 2023, $(2.7) million in FY 2024 and $(3.5) million in FY 2025. The direct revenue loss associated with the bill would increase in later years as more assets acquired after 2017 are sold.
2/16/18