Capital gains tax would infuse $7 billion in state revenue annually, New York legislators say

(The Center Square) – A bill targeting New York’s highest income earners with a new capital gains tax is working its way through both chambers of the state Legislature. The renewed effort comes as New York is grappling with a multibillion dollar deficit.

State Sen. Gustavo Rivera, D-Bronx, and state Assemblyman Ron Kim, D-Queens, say their sponsored legislation would bring in $7 billion in revenue annually. The figure is based on a provision investors be taxed at a rate of 7 percent to 17 percent, based on income tier.

Senate Bill S.2522 currently is in the Budget and Revenue Committee, while Assembly Bill A.3352 is in the hands of the Ways and means Committee.

Rivera and Kim’s latest capital gains proposal runs counter to federal policy, which sets a lower tax rate on income gains from investments than traditional income sources, such as wages. And opponents of such a proposal say it could drive people out of the state.

“In addition to potentially changing investment decisions and reducing the overall amount of capital invested (cutting into future taxable returns), the tax could easily drive some of New York’s wealthiest taxpayers out of state – depriving the state of their existing income tax payments (including on capital gains), along with other taxes they remit, ultimately including estate taxes in many cases,” wrote Jared Walczak with the Tax Foundation, a Washington, D.C.-based think tank, in a Jan. 29 policy brief.

Walczak also argued that the proposal was effectively a tax on wealth, which is prohibited by the state’s constitution.

In Rivera’s memo outlining the rationale behind the legislation, he said the bill’s purpose is to mitigate “the unfair federal tax benefit for income earned from investing, rather than working.”

He said he is sponsoring the legislation because he believes New York is among the most inequitable states in the country on its tax policy.

“In part, this is because our tax system has not kept pace with changes in the economy, leaving the many high-earning professionals and wealthy families in this state under-taxed,” Rivera said.

He continued, “Economic growth from recent decades has overwhelmingly benefited a small segment of elites, while inflation-adjusted wages have stagnated for the vast majority of working people since the 1970s.”

Kim previously sponsored a similar bill during the 2019-20 legislative session, which eventually died in committee.

In recent weeks, Kim has been a vocal supporter of the Invest in Our New York Act, which is a larger effort aimed at taxing high income earners to the tune of $50 billion through a package of bills to address cash-starved services during the pandemic.

“Taxing capital gains is part of the #InvestInOurNY package designed to minimize tax avoidance as we focus on raising over $50 billion in new revenues from Wall Street, mega corporations and ultra rich,” Kim wrote in a Feb. 3 social media post via Twitter.

New York state’s current budget shortfall is in the range of about $15 billion from COVID-19 lockdowns and other measures.

Analysts have been weighing in on the capital gains tax legislation since it has been released.

The bill could have a number of consequences if passed into law, Walczak said.

“No market system anywhere in the world has ever used market-to-market taxation,” he wrote.

He continued, “New York is often an innovator, but as we have observed previously, implementing such a system at the state level would be incredibly daunting and economically uncompetitive, even if it did not raise major constitutional concerns.”

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