A key plank in California gubernatorial candidate Meg Whitman’s (R) job creation plan is completely eliminating her state’s capital gains tax. Such a move would blow a $4 to $4.5 billion annual hole in the budget over the next five years (and the losses would get bigger after that), but Whitman is convinced that such a move would spur job creation and investment in the Golden State.
“If we eliminate this capital gains tax, what you’ll see is more jobs, more businesses, more tax revenues so we can invest in the things we really want to invest in,” Whitman said during a debate this week. “To the Recovery effort that I have planned, tax cuts are a big part of it.” Whitman doubled down yesterday on Fox News, telling Neil Cavuto, “we’ve got a decision to make. Either, as Californians, we’re going to put our head in the sand and say ‘the weather’s great here, but jobs are going to continue to leave the state’ or we’re going to change our whole perspective.” Watch a compilation:
Whitman portrays this idea as a definite job creator, but the truth is much cloudier. What is certain, however, is that this tax cut will primarily benefit the wealthy. 82 percent of the California’s capital gains tax is paid by people who make $500,000 per year. Those people make up just one percent of the state’s population. 93 percent of the tax is paid by people making more than $200,000 per year.
Just 1.5 percent of the capital gains tax is payed by those making between $30,000 and $100,000. Also, California taxes capital at the same rate that it taxes income, making this change even more egregious, as it remakes a system that equally values work and investment, almost exclusively to the benefit of the wealthy.
As for spurring investment, Kirk Stark, a UCLA tax law professor, said, “it’s unlikely that a capital gains tax cut would lead to significantly greater investment in California.” “What we’re talking about here are people buying and selling stocks,” he said. “A lot of capital gains is not related to entrepreneurial activity,” added Jean Ross, executive director of the California Budget Project. “It’s ‘Did I pick the right mutual fund last year or pick Apple stock before the iPad was released?’”
UC Berkely professor Michael Reich noted that the research on capital gains cuts reveals that the “net effect of lower rates on revenues is negative and the effects on economic growth are extremely small at best.” “Eliminating the state capital gains tax would do very little to spur investment in the state,” Reich wrote. “Most California investors’ portfolios are diversified nationally and internationally. Consequently, the vast majority of private income retained by investors would be spent on stock purchases of companies outside the state.”
This is the crux of Whitman’s job creation plan. So if the research is to be believed, that plan leaves a lot to be desired.