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Capital gains tax break passes House

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Got stocks, land or similar investments?

The state House voted 35-25 Wednesday to give you a tax break when you sell those items.

But how much you will pocket depends, quite frankly, on how much you make. And the 183 richest Arizonans — those making more than $5 million a year — will each walk away with an average of an extra $27,000.

At issue are capital gains. That’s the difference between what people pay for an investment against what they make when it is sold.

By state law, the profits on anything held for less than a year are taxed as regular income. But long-term gains — investments held for more than a year — are subject to a 25 percent discount when computing state income taxes.

What the House approved Wednesday as HB 2528 would increase that deduction, in steps, to 50 percent.

Rep. Mitzi Epstein, D-Tempe, said the change makes sense for seniors on fixed income who are depending on their investments “to live into their old age.” And if the legislation were limited to that, she said she would support it.

But Epstein cited a report by legislative budget analysts which shows that the change, once fully implemented, will cut state revenues by $23 million a year. That, she said, is money that should be used for other state needs, like hiking teacher pay.

So she proposed applying the proposal only to those who are at least 65 years old and have income of less than $75,000 a year.

That did not sit well with House Speaker J.D. Mesnard, R-Chandler, who wants the higher deduction for everyone. He said there is no precedent to crafting the tax code based on someone’s age, though Mesnard acknowledged that there are laws to protect some seniors, like property tax breaks.

Anyway, Mesnard argued it is wrong to think about his proposal simply as a tax break.

“Capital gains is investment in the economy,” he said.

“Investment in the economy is good for everybody,” Mesnard said. “And we want to encourage that as much as possible.”

But Epstein pointed out that someone need not invest in Arizona to get the favorable state tax treatment.

“People could invest in the wonderful place that is Dubai,” she said, or China or anywhere on earth.

“They invest there, they live in Arizona, and they get to not pay for anything that is going on in Arizona where they are reaping the benefits of the wonderful things that we pay for in Arizona,” she said.

Mesnard countered that those who live here are likely to invest in Arizona. But he said it ultimately does not matter if Arizonans get their profits from investments elsewhere.

“They’re living here and spending here,” Mesnard said. “And that’s a good thing.”

That still leaves the question of who benefits.

Epstein said those with adjusted gross incomes between $10,000 and $20,000 a year will get just 1 percent of the tax break. By contrast, she said, 12 percent of the cash will go to those in the $200,000 to $500,000 income range, and 26 percent will go to those earning $1 million to $5 million.

And she said the impact analysis finds that 22 percent of the tax break — a total of $5.2 million when the law is fully implemented — will go to those who are in the $5 million plus tax bracket.

“And there are only 183 of them,” Epstein said, meaning an average tax break for each of them of more than $27,000.

That did not bother Rep. Jay Lawrence, R-Scottsdale.

“The rich people pay 80 to 85 percent of the taxes from which we all benefit,” he said. “The lower income people, about who Rep. Epstein is defending, 10 percent of those people pay zero percent in taxes.”

That comment drew derision from Rep. Kirsten Engel, D-Tucson, who called it “trickle-down economics.”

The measure now goes to the Senate.

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