The Debate Over Capital Gains has Consequences for Local Budgets

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The debate over capital gains taxes taking place on the national stage in the run-up to this year’s presidential elections could have major implications for local and state governments in the Washington region, economists say, particularly if the Bush tax cuts are allowed to expire.

Capital gains are not just a key source of income for the wealthy, one that critics say allows them to pay lower taxes, but they are a big source of revenue for the District, Maryland and Virginia.

“We have a lot of wealthy people here, and wealthy people have a lot of capital gains,” said Marty Sullivan, an economist at Tax Analysts.

Comprised of profits from investments such as stocks, bonds and real estate, capital gains have fallen in recent years as the stock market plunged and the housing market soured. The ailing economy, coupled with lower tax rates for capital gains has led to “tens of millions” of dollars of lost revenue for the District alone, said Fitzroy Lee, deputy chief financial officer at the District’s Office of Revenue Analysis.

In 1997, then-President Bill Clinton lowered the tax rate for capital gains to 20 percent from 28 percent. Six years later, President George W. Bush trimmed the rate further to 15 percent. Bush’s tax cuts are slated to expire on Jan. 1, 2013, unless Congress intervenes.

Revenue from “capital gains [has] really suffered after the tax cuts,” said Anirban Basu, chairman of Sage Policy Group, an economic policy firm in Baltimore. “The impact of reduced capital gains has been huge, particularly for state and local government budgets.”

 

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