Last month, several revenue options being discussed by the Senate Democratic Caucus (SDC) were made public. One of the ideas is to increase the capital gains tax rate. (I’ve previously written about their ideas for business and occupation tax increases, a payroll tax, and a wealth tax.)

Under current law, the capital gains tax rate is 7%, with a standard deduction of $270,000 for tax year 2024. (The original standard deduction was $250,000, but it is adjusted for inflation annually.)

The SDC idea is to increase the tax rate to 9.9% for gains over $1 million. The current 7% rate would still apply to gains between the current deduction and $1 million. They estimate that this would increase revenues by $282 million in 2025–27 and by $279 million in 2027–29. Compared to the current forecast for capital gains revenues, that would be an increase of 34.2% and 31.7%, respectively.

An alternate version from the SDC would be to increase the tax rate to 9% on all gains over $250,000. This would increase revenues by an estimated $260 million in 2025–27 and $257 million in 2027–29. Compared to the current forecast for capital gains revenues, that would be an increase of 31.6% and 29.2%, respectively.

Neither of these proposals have been introduced in the Legislature. If a bill is introduced to increase the capital gains tax rate for general purposes, it will be interesting to see how they direct the revenues. Under current law, the first $500 million collected in a year is deposited in the education legacy trust account (ELTA); anything over that is deposited in the common schools construction account (CSCA). (The $500 million threshold is adjusted for inflation annually.)

This is the mechanism by which the Legislature addressed the inherent volatility of capital gains taxes. Effectively, the amounts that go to the ELTA are used for ongoing spending and anything above the threshold is used for one-time construction projects. State budgets are less sustainable when they rely on volatile revenue sources.

In 2023, the first year of capital gains tax collections, there was a deposit to the CSCA. There was not one in 2024, and the current revenue forecast does not anticipate another CSCA deposit in the forecast window. If either of the SDC capital gains tax increases were adopted, it appears that the estimated revenues would be close to the threshold and may slightly exceed it in some years.

Note that two bills have been introduced this year (SB 5233 and HB 1445) that would lower the capital gains tax standard deduction to $200,000 and create a tiered rate structure. The rate would be 5% on gains between $200,000 and $250,000; the existing 7% on gains between $250,000 and $300,000; and 9% on gains over $300,000. The new revenues (from the 5% rate and the additional 2% rate on gains over $300,000) would be used for health care services. There are no fiscal notes for the bills.