Capital Gains: An Enormous Tax Break to the Wealthiest Out-of-Staters

Dec 26, 2018

By MBPC Staff

In just a few short weeks, the 2019 Montana Legislature will begin, and MBPC will again advocate for public policies that make our tax system fairer and bring in needed new revenue. One of the policies in need of reform is Montana’s capital gains tax credit. A recent national report highlighted how states tax capital gains wealth, and you may be surprised to learn that Montana is one of only nine states that treat income from capital gains differently than income from hard work.

Capital gains are investors’ profits from selling assets. They are received overwhelmingly by wealthy households. A handful of states including Montana are giving these wealthy investors tax breaks.

This tax advantage for investment income, as opposed to wages and salaries, makes the rich richer at the expense of the rest of us. As white families in the nation are three times more likely to be in the top 1 percent of taxpayers than families of color, this lower tax rate exacerbates the racial wealth gap. As wealth accumulates over generations over time, family wealth levels today reflect historical racial disadvantage and discrimination. Policies that increase the wealth of white families faster than families of color enlarge this gap.

Most states know better than to favor wealth over work. Only nine states tax capital gains less than ordinary income. Some states have been reconsidering capital gains tax breaks in recent years. In fact, Rhode Island has eliminated theirs, and Vermont and Wisconsin have reduced theirs.

Montana’s capital gains tax credit cost the state almost $50 million in 2017, and 90 percent of the people claiming this credit are from out-of-state. This money could have been used to invest in education, community health, infrastructure, or clean air and water. Instead, Montana gave an enormous tax break to the wealthiest out-of-staters.

What Should Montana Do?

Stand with the majority of states that know taxing wealth at a lower rate than income from work is bad policy and doesn’t help our communities. This year legislators should strengthen Montana’s tax code by eliminating the capital gains tax credit for millionaires.