PHOENIX - Saying "job creators" need more incentive, Arizona lawmakers took the first steps to reducing - and in some cases eliminating - state income taxes on capital gains.
On a party-line vote Monday, the House Ways and Means Committee decided the wealthiest individuals - those with $50,000 in individual income or $100,000 for couples - would no longer pay state income taxes on capital gains at the same rate as regular earnings. Instead, the effective rate would be 43 percent of the tax rate on regular income.
That's the same difference that exists in federal law between a top tax rate of 35 percent for regular income and the 15 percent rate for capital gains held more than a year, said Garrick Taylor, lobbyist for the Arizona Chamber of Commerce and Industry.
The proposal would mean those earning less than the $50,000/$100,000 figure would owe no Arizona taxes on capital gains.
By the same margin, the committee approved two other measures, both of which would go further than the federal law. They would make future capital gains tax exempt, though their approaches differ slightly.
All three bills now go to the full House for consideration.
The moves come amid a national debate over the favorable treatment given capital gains at the federal level. That heated up after Republican presidential contender Mitt Romney released his tax returns that showed he paid a relatively low effective tax rate of 13.9 percent, largely because his income is mostly from investments.
Nine states already impose a lower tax rate on capital gains than on regular income, said Steve Slivinski, an economist from the Goldwater Institute.
He said New Mexico, which lowered its capital-gains tax, showed it can produce venture capital to promote growth.
But Rep. Steve Farley, D-Tucson, said Arizona cannot afford the loss of revenues. He said legislative budget analysts, looking at a similar bill last year, said eliminating the levy would cut tax collections by more than $420 million a year. "That's almost our entire surplus for this year alone," Farley said.
And he said the state only has a surplus because voters approved a temporary hike in state sales taxes.
"So we're taking the money away from kids, from foreclosed homeowners, and we're giving it, in effect, to millionaires," Farley said.
Rep. Ted Vogt, R-Tucson, countered that encouraging investment will help prevent the "lopsided economy" Arizona had, which was "way too dependent on growth for growth's sake."