According to the Department of Revenue (DOR), the state has collected $433 million in capital gains taxes for tax year (TY) 2023 as of May 17. As of Jan. 2024, DOR had reported that TY 2022 capital gains collections totaled $896 million. However, based on the new information from DOR, it appears that additional late payments and refunds for TY 2022 reduced (on net) the total collected for TY 2022 to $786 million. Compared to this revised TY 2022 number, TY 2023 capital gains tax collections are down by 45%.

Capital gains tax returns were due to the state on April 15. Although taxpayers may request extensions (until October 16), they had to make estimated payments on April 15. This means that although the $433 million is not the final number, it is likely very close to the final. Meanwhile, DOR reports that 3,850 capital gains tax returns were filed for TY 2023. (3,895 returns were filed for TY 2022.)

The substantial decrease in collections from TY 2022 to TY 2023 could have occurred because taxpayers rearranged their affairs to minimize capital gains taxes. (The state Supreme Court upheld the tax on March 24, 2023.) Additionally, the decrease could reflect a generally worse year for capital gains. (If this is the case, the effect will show up in other states’ capital gains tax collections.)

Either way, we still only have two years of data, so it’s hard to guess which year of collections will turn out to be more representative over the long run. On top of that, capital gains taxes are volatile.

To help manage that volatility, the capital gains tax statute directs the first $500 million (adjusted for inflation) to the education legacy trust account (ELTA) because it was thought that the tax would reliably generate at least that amount each year. The ELTA is a fund subject to the outlook (NGFO), so it is part of what is essentially the general fund budget.

Any amounts over $500 million go to the common schools construction account (CSCA); thus, unusually high revenues are meant to be used for one-time spending. If the $433 million collected on TY 2023 turns out to be normal, the state should lower the $500 million threshold to ensure that the state isn’t budgeting around unlikely revenues.

State Budget Impacts

For fiscal year (FY) 2023 (which ended June 30, 2023), NGFO revenues included $500 million from the capital gains tax. Additionally, $348 million was deposited in the CSCA in FY 2023. For FY 2024 (including the TY 2023 collections and the net refunds for TY 2022 that occurred in FY 2024), NGFO revenues from the capital gains tax total $371 million. There will be no CSCA deposit for FY 2024.

The Feb. 2024 revenue forecast (on which the 2024 supplemental budget was based) estimated that FY 2024 capital gains revenues would be $524 million for the NGFO and $149 million for the CSCA. (The chart compares actual capital gains tax revenues by fiscal year to the Feb. 2024 forecast.)

Total actual capital gains collections for FY 2024 are $302 million (45%) lower than the Feb. 2024 forecast. Actual FY 2024 capital gains collections for the NGFO are $153 million (29%) lower than estimated in the forecast. (For context, the Feb. 2024 forecast estimated that total NGFO revenues from all sources would be $32.919 billion in FY 2024.)

The full impact to the 2023–25 operating budget (as amended this year) from the lower collections is unknown—the June revenue forecast could revise future capital gains revenues (including FY 2025, the second year of 2023–25) down given this year’s drop. (However, as we noted in our brief on the 2024 supplemental, even if the capital gains tax is repealed entirely, state reserves could cover the loss for the biennium.) The 2023–25 capital budget, on the other hand, will not need to make any revisions based on the lower revenues. It prudently did not assume any capital gains revenues to the CSCA over what was collected for TY 2022.