Low capital gains rates opportunity for California

Daily News | The heated debate between California’s gubernatorial candidates over a subject seemingly as dry as capital gains tax rates thankfully puts the lie to the notion that politicians don’t discuss real issues. Capital gains rates are as real as it gets when discussing how to make the state and the nation more prosperous again.

It’s remarkable in a way that there even is a debate in California over the issue of whether to keep capital gains tax rates low as a means to boost economic growth. Many today believe that the 1978 cut in capital gains tax rates not only helped make Silicon Valley the center of technological breakthroughs, but has also had a strong, positive and lasting impact on overall investment, economic growth and job creation in the U.S. The 2003 capital gains tax cuts have also been a boon to the U.S. economy.

Perhaps it is this perspective that explains why Meg Whitman’s background affords her a perfect perch from which to support a pro-growth policy set.

While Whitman is a Republican, it should be noted that both parties at different times have had records of trying to keep capital gains rates in check. It was President John F. Kennedy who said in 1963: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital … the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”

That is true nationally, but very particularly true in California, which faces an already-difficult business environment. In CNBC’s ranking for best states in which to do business in 2010, California tied Arkansas for the 32nd spot, making neighboring Arizona much more inviting at 18th and Oregon a viable alternative for businesses at 23rd. Most important, though, was California’s ranking as 48th worst in the cost of doing business.

So shouldn’t the government be trying to make it less expensive for businesses, small business owners and entrepreneurs, and workers to start companies, innovate, and save for retirement? That’s precisely what maintaining low capital gains rates allows.

Tax policy is one of the primary ways to quickly change a state’s fortunes, for better or worse.

An analysis conducted for the American Council for Capital Formation by Ernst & Young found that the average top individual state capital gains tax rate on corporate equities was 5.8 percent in 2008.

Taken together, state capital gains taxes, combined with the federal tax are a direct impediment to entrepreneurship and consequently to economic growth. Thus, keeping the combined rates of federal and state rates low will have a short-term and long-term positive impact on the economy.

This is backed up by recent research by Allen Sinai, president and chief global economist of Decision Economics, Inc., who found raising the nation’s current top individual capital gains rate from 15 percent to 20 percent – just 5 percentage points more – would cut real annual economic growth by an average of .05 percent per year and job growth would decline throughout the economy by an average of 231,000 in the 2011-2016 period. The same effect applies to states adding on their own additional tax rates above the nation’s average, because the same core economic decision processes are at play for employers and investors.

California has a golden opportunity to get back on the right track for creating capital, wealth and jobs. It needs to trust its own historical experience and keep capital gains rates low.

Mark Bloomfield is president and CEO of the American Council for Capital Formation (www.accf.org), a nonprofit, nonpartisan organization dedicated to public policies supportive of saving and investment to promote long-term economic growth.