Minnesota’s combined capital gains tax rate would be over 50% under Biden’s tax plan
On April 28, President Joe Biden unveiled “The American Families Plan”, a $1.8 trillion spending proposal aimed at families and children. The program will be funded partly by raising the capital gains tax on high-income earners from 23.8 percent to 39.6 percent. Including the net investment income tax, it means that the top federal tax rate on capital gains will be 43.4 percent.
The average top tax rate on capital gains at the state level is about 5.2 percent, for a combined average rate of 29 percent under current law. If the top federal capital gains rate rises to 43.4 percent, this would raise the combined tax rate on long-term capital gains to 48.4 percent.
What does this mean for Minnesota?
Our state already has a higher-than-average top marginal capital gains tax of 33.7 percent. Under Biden’s proposal, that would rise to 53.3 percent.
This would be disastrous for the state. For one, high taxes on capital gains will likely distort investment allocation. People may defer selling an asset to escape high taxes. Consequently, capital would be held up by owners and not go where it is valued the most in the Market.
The Tax Foundation estimates that
raising the top capital gains tax rate to 39.6 percent for those earning over $1 million would reduce long-run GDP by about 0.1 percent and reduce federal revenue by about $124 billion over 10 years.