As the debate on federal tax reform continues, the ACCF Center for Policy Research (CPR) presents this Special Report to further the debate and highlight the effect of increased federal tax rates on long-term individual capital gains tax rates when both the federal, state and, in some cases, local tax rates are combined. Long-term individual capital gains contribute significant amounts to state’s taxable income. Thus important questions are whether higher federal rates, combined with state capital gains taxes may reduce state’s budget receipts as well as overall investment and job growth.
Growing talk of tax reform and ongoing discussion of the “Buffett Rule”, based on the idea that wealthy individuals should pay a higher percentage of their in- come in Federal taxes, has once more put the taxation of investment income and capital gains in the spotlight. Currently, the Federal top individual capital gains tax rate is 15%, however this rate is set to expire on December 31, 2012 and revert to 20% in 2013. In addition, high income households (single filers making more than $200,000 or married couples making more than $250,000) will be subject to a new 3.8% Medicare tax on their investment income starting in 2013. Recently, President Obama stated in his 2013 budget that Americans “making over $1 million, should pay no less than 30 percent of their income in taxes.” It is unclear whether President Obama’s new 30% tax minimum target rate would include the Medicare tax.