Biden Capital Gains Tax Plan
President Joe Biden’s American Family Plan will likely include a large increase in the top federal tax rate on long-term capital gains and qualified dividends, from 23.8 percent today to 39.6 percent for higher earners. When including the net investment income tax, the top federal rate on capital gains would be 43.4 percent. Rates would be even higher in many U.S. states due to state and local capital gains taxes, leading to a combined average rate of 48 percent compared to about 29 percent under current law.
A high combined capital gains tax rate would influence when taxpayers decide to sell assets and realize the gain. If the effect is large enough, federal revenue from capital gains income would decline because taxpayers have decided to avoid realizing gains and the higher tax rate.
Most states levy their individual income tax rates on long-term capital gains and qualified dividends, though Hawaii levies lower tax rates. Nine states provide general exclusions or deductions for long-term capital gains. 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.
Thirteen states and the District of Columbia would have a top combined capital gains tax rate north of 50 percent. California, New York, and New Jersey would have combined rates of more than 54 percent. Top combined rates in some localities would go even higher. For example, New York City levies a local capital gains rate of 3.876 percent, which means an investor would pay an all-in rate of nearly 58.2 percent. Residents of Portland, Oregon would face a top capital gains rate of 57.3 percent.
Using the Tax Foundation General Equilibrium Model, we find 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.
| Gross Domestic Product (GDP) | -0.1% |
| Gross National Product (GNP) | -0.2% |
| Capital Stock | -0.1% |
| Wage Rate | -0.1% |
| Full-Time Equivalent Jobs | -15,000 |
| Conventional 10-Year Revenue, 2022 to 2031 | -$123.5 |
| Dynamic 10-Year Revenue, 2022 to 2031 | -$132.9 |
|
Source: Tax Foundation General Equilibrium Model, March 2021. |
|
Under Biden’s proposal for capital gains, the U.S. economy would be smaller, American incomes would be reduced, and federal revenue would also drop due to fewer capital gains realizations. Other proposals, such as partially repealing step-up in basis for capital gains, may help offset the realization effect and increase federal revenue, but it remains important to consider the combined tax rate on capital gains in the context of the President’s tax proposals.
| Top Capital Gains Rate (Current Law) | Top Capital Gains Rate (Proposed) | |
|---|---|---|
| Alabama | 28.8% | 46.4% |
| Alaska | 23.8% | 43.4% |
| Arizona | 29.8% | 49.4% |
| Arkansas | 26.8% | 46.4% |
| California | 37.1% | 56.7% |
| Colorado | 28.4% | 48.0% |
| Connecticut | 30.8% | 50.4% |
| D.C. | 32.8% | 52.4% |
| Delaware | 30.4% | 50.0% |
| Florida | 23.8% | 43.4% |
| Georgia | 29.6% | 49.2% |
| Hawaii | 31.1% | 50.7% |
| Idaho | 30.7% | 50.3% |
| Illinois | 28.8% | 48.4% |
| Indiana | 27.0% | 46.6% |
| Iowa | 32.3% | 48.6% |
| Kansas | 29.5% | 49.1% |
| Kentucky | 28.8% | 48.4% |
| Louisiana | 29.8% | 47.0% |
| Maine | 31.0% | 50.6% |
| Maryland | 29.6% | 49.2% |
| Massachusetts | 28.8% | 48.4% |
| Michigan | 28.1% | 47.7% |
| Minnesota | 33.7% | 53.3% |
| Mississippi | 28.8% | 48.4% |
| Missouri | 29.2% | 48.8% |
| Montana | 30.6% | 50.2% |
| Nebraska | 30.6% | 50.2% |
| Nevada | 23.8% | 43.4% |
| New Hampshire | 28.8% | 48.4% |
| New Jersey | 34.6% | 54.2% |
| New Mexico | 27.3% | 46.9% |
| New York | 34.7% | 54.3% |
| North Carolina | 29.1% | 48.7% |
| North Dakota | 25.5% | 45.1% |
| Ohio | 28.6% | 48.2% |
| Oklahoma | 28.8% | 48.4% |
| Oregon | 33.7% | 53.3% |
| Pennsylvania | 26.9% | 46.5% |
| Rhode Island | 29.8% | 49.4% |
| South Carolina | 27.7% | 47.3% |
| South Dakota | 23.8% | 43.4% |
| Tennessee | 23.8% | 43.4% |
| Texas | 23.8% | 43.4% |
| Utah | 28.8% | 48.4% |
| Vermont | 32.6% | 52.2% |
| Virginia | 29.6% | 49.2% |
| Washington | 23.8% | 43.4% |
| West Virginia | 30.3% | 49.9% |
| Wisconsin | 29.2% | 48.8% |
| Wyoming | 23.8% | 43.4% |
| Average (unweighted) | 29.0% | 48.4% |
|
Source: Tax Foundation calculations, state statutes. |
||
Errata: This piece has been updated to include the effect of state tax exclusions and deductions for capital gains.
Was this page helpful to you?
Thank You!
The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?
Contribute to the Tax Foundation
Let us know how we can better serve you!
We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?
Related Posts:
About Author
aallenlenth
Why Taxes? Why Now? "We opened up shop here in the Wylie, Sachse, Murphy area in 2018 with a passion to help start-ups and small businesses get on top of their bookkeeping,” Allen explains. “What we found was a lot of folks just don’t get the tax game. And now that there are new laws and regulations, many are starting to panic; but trust me, small businesses have everything to gain with the new Section 179 Deductions. “After filing a few late returns, in that first year, we learned that there is a real need for some tax expertise. We spent a good part of 2018 getting up to speed on tax law, and now I am an Enrolled Agent, federally licensed to practice before the IRS on behalf of my clients and anyone else who may be facing the daunting ‘IRS boogie man.’ “During tax season, we are prepared to handle it all. For individuals we have helped folks with past-due tax returns and work with the IRS to eliminate all penalties... sometimes we given get rid of the tax debt itself. For companies the biggest problem businesses of all sizes have is filing and paying their payroll taxes - both state and federal - on time. The rules for 940s and 941s are extremely confusing so we have helped a lot of companies catch up. If they like our work, they sometimes retain us for bookkeeping and payroll. To sign up for our free weekly newsletter go to our homepage www.ExecutiveTaxSolution.com to sign up for our free monthly newsletter and receive year-round tax tips. (469) 262-6525 services@executivetaxsolution.com www.executivetaxsolution.com