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Home Publications Blogs Beat the Press Fiscal Surpluses in States Likely Driven by Capital Gains Income

Fiscal Surpluses in States Likely Driven by Capital Gains Income

Monday, 03 February 2014 06:06

The NYT had a piece noting how states across the country are seeing better budget pictures than they had projected. While this is attributed to growth, economic growth in 2013 was pretty much in line with expectations (worse in first half, better in second). The more plausible explanation is that the run-up in the stock market to both more capital gains taxes (a point that is noted) and also for capital gains income in many cases to be reported and taxed as normal income.

For tax purposes, short-term capital gains (assets held less than a year) are treated the same as normal income. Therefore it is likely that many households just report capital gains earnings as normal income. This would explain why the statistical discrepancy turns negative following large run-ups in asset prices such as the stock bubble in the 1990s and the housing bubble in the last decade.


The implication of this scenario is that much of the increase in the tax revenue that states are now seeing is ephemeral. Unless stock and/or house prices continue to rise at an extraordinary pace, the statistical discrepancy will fall back toward zero and the extra tax revenue states are now seeing will disappear.


Comments (5)Add Comment
Republican's tout gains due to their tax cuts
written by jumpinjezebel, February 03, 2014 12:40
In the midwest - land of the lunatics of Kansas - these Republicans are taking credit for this bump to say "We decreased taxes and see the results". Of course they all say "Obama's policies have caused the low growth and unemployment" without noting all their obstruction and fillibustering ALL of his proposals. What we have now is the result of Bernake doing the work of Congress and without it we would still be going lower with a Depression. Trickle Down is the lie of the Century.
Capital Gains
written by Graham_N.G, February 03, 2014 12:41
It is probably a good bet that most households report capital gains income as regular income. The economy may look good on paper, but most are still in a situation where they have to watch every penny. As a result, they may choose to do their own taxes and many not know that capital gains should be reported differently. That said, they may figure it doesn't matter as long as it gets reported.




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Most Americans have no capital gains
written by Robert Weiler, February 04, 2014 12:41
Most Americans have no capital gains, and the ones that do have them are usually in 401K or IRA accounts which wouldn't be taxed anyway until withdrawal, or have a gain on their house which is tax exempt up to $500K for a married couple filing jointly. A handful of Americans that have almost all the capital gains they almost invariably have an accountant as well.
Unless I'm missing something
written by Ellen1910, February 04, 2014 1:17
I don't see why commenters are so sure American investors don't know how to prepare a tax return or why commenters think the few state which differentiate long-term capital gains from short-term rates would make any difference to the result.

The only states which have long-term capital gains rates lower than ordinary income are AR, MT, NM, ND, SC, and WS.
Taking cap gains to survive
written by Marko, February 04, 2014 2:09
I suspect there are many middle-class households that are drawing down their (relatively meager) stock wealth as a way to get by , likely adding to cap gains reported by those at the top. The rebound in the market would have made the decision to do so easier to rationalize. We're going to find out that the bottom 80-90% has very little financial wealth of any kind left if incomes don't start growing more broadly across the distribution.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.