Taxing Investment Income in the States New Hampshire Fiscal Policy Institute 2 nd Annual Budget and Policy Conference Concord, NH January 23, 2015

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1 Taxing Investment Income in the States New Hampshire Fiscal Policy Institute 2 nd Annual Budget and Policy Conference Concord, NH January 23, 2015 Norton Francis State and Local Finance Initiative Urban-Brookings Tax Policy Center

2 What is Investment Income

3 U.S. Investment Income Income reported on tax returns Fiscal cliff Source: IRS

4 New Hampshire Investment Income Income reported on tax returns Source: IRS

5 Interest Income Federal: State and Local bonds exempt States: All states except those listed exempt interest on bonds issued by governments within the state. Special bond exemptions: IL, IA, KS, MI, UT, WI Exempts all bond interest even out of state bonds: IN, ND, DC (plus no tax states) Other interest exemptions: OK, TN, MA

6 Interest Income: $876 million in 2012 NH 2011 US Federal Adjusted Gross Income % reporting (Reporting Only) % reporting (Reporting Only) Less than $50,000 * $ % $ 841 $ % $ 1,138 $50,000 to $200, % 1, % 1,407 $200,000 and up 28,191 87% 32,319 11,844 88% 13,436 All $ 1,401 42% $ 3,352 $ % $ 2,358 NH 2012 Federal Adjusted Gross Income % reporting (Reporting Only) % reporting (Reporting Only) Less than $50,000 * $ % $ 808 $ % $ 867 $50,000 to $200, % 1, % 1,269 $200,000 and up 24,408 83% 29,280 11,235 86% 13,106 All $ 1,288 36% $ 3,588 $ % $ 2,328 US * Excludes returns with negative income which are included in total Source: IRS Statistics of Income Table 2

7 Dividend Income Federal: Qualified dividends taxable at preferential rate States: All states except those listed tax dividends as normal income Full or Partial exemption: AK (100%), FL (100%), ND (40%), NV (100%), SD (100%), TN (100%), TX (100%), WA (100%), WY (100%) Special exemptions: KS, MI, MT, NE, NJ, TN

8 Dividend Income: $987 million in 2012 NH US Federal Adjusted Gross Income % reporting (Reporting Only) % reporting (Reporting Only) Less than $50,000 * $ % $ 1,883 $ 169 9% $ 1,806 $50,000 to $200,000 1,020 31% 3, % 3,056 $200,000 and up 16,367 66% 24,950 17,343 66% 26,352 All $ 1,087 21% $ 5,080 $ % $ 5,565 NH Federal Adjusted Gross Income % reporting (Reporting Only) % reporting (Reporting Only) Less than $50,000 * $ % $ 2,445 $ 164 9% $ 1,764 $50,000 to $200,000 1,105 31% 3, % 3,337 $200,000 and up 22,233 66% 33,557 26,481 66% 40,018 All $ 1,451 22% $ 6,646 $ 1,385 18% $ 7,900 US * Excludes returns with negative income which are included in total Source: IRS Statistics of Income Table 2

9 Capital Gains Federal: Preferential rate for long term 20% top rate plus 3.8% health surtax for high income earners. $3,000 loss cap with carry-forward of losses Principle residence $250,000/$500,000 exempt States: Follow Federal: CA, DE, DC, GA, IN, MD, MS, NY, RI, WV Exemption: AK (100%), AZ (10%), FL (100%), NH (100%), NM (50%), NV (100%), ND (40%), SC (44%), SD (100%), TX (100%), WA (100%), WI (30%), WY (100%) Exemption for some or all in-state gains: CO, ID, IA, LA, MT, NE, OK, OR, UT, VA, VT, WI Exemption for all or some muni bond interest: CT, KS, KY, ME, NJ, OH Special exemptions: KY, MI, MN, MO, MT, OK, UT, TN Special alternative tax: HI, MA Loss Differences: AL (no cap), CT (bonds), NJ (no losses allowed), PA (no cap), WI ($500 cap)

10 Capital Gains: $2.6 billion in 2012 NH 2011 Federal Adjusted Gross Income % reporting (Reporting Only) % reporting (Reporting Only) Less than $50,000 * $ 37 10% $ 376 $ 61 8% $ 773 $50,000 to $200, % 3, % 3,119 $200,000 and up 69,941 65% 106,834 67,636 66% 102,694 All $ 2,738 18% $ 15,473 $ 2,522 15% $ 16, NH US Federal Adjusted Gross Income % reporting (Reporting Only) % reporting (Reporting Only) Less than $50,000 * $ 62 10% $ 643 $ 48 8% $ 610 $50,000 to $200,000 1,108 25% 4, % 3,920 $200,000 and up 89,116 66% 134, ,075 67% 154,893 All $ 3,858 18% $ 21,320 $ 4,167 16% $ 26,634 US * Excludes returns with negative income which are included in total Source: IRS Statistics of Income Table 2

11 Capital Gains Table 1C. Long-Term Capital Gains and Losses, by Asset Type [All figures are estimates based on samples --number of transactions are in thousands, money amounts are in thousands of dollars] All transactions Gain Transactions Loss transactions Transactions by asset type Number Net gain/loss Number Gain Number Loss (1) (4) % of Column (5) (8) % of Column (9) (12) % of Column Total 109,950 21,436,010 32, ,952,345 68, ,516,335 Corporate stock 56,485 8,482,012 40% 16, ,580,208 36% 37, ,098,196 35% Mutual funds, except tax-exempt bond funds 29,584-44,178, % 4,499 7,911,927 2% 23,649 52,090,420 18% Capital gain distributions 4,224 2,454,426 11% 4,224 2,454,426 1% 0 0 0% Pass-through gains or losses 4,085 33,516, % 1,765 97,704,637 31% 2,156 64,187,765 22% Other assets 2,656-6,818,722-32% ,864,199 6% 1,036 26,682,921 9% State and local government obligations 2,458-16,828 0% 775 2,266,953 1% 663 2,283,780 1% Tax-exempt bond mutual funds 1,870-1,917,245-9% ,163 0% 1,218 2,467,408 1% Depreciable business personal property 1, ,381 4% 155 1,780,931 1% ,550 0% Partnership, S corporation, and estate or trust interests 1,447 11,392,320 53% ,519,091 8% ,126,771 5% U.S. Government obligations 1, ,842 2% ,733 0% ,891 0% Other bonds, notes and debentures 880-1,579,504-7% 172 1,202,979 0% 358 2,782,483 1% Residential rental property ,902 4% ,680,454 4% ,874,552 4% Livestock 530 1,413,098 7% 257 1,736,388 1% ,289 0% Depreciable business real property 368 5,303,102 25% ,234,631 3% 97 4,931,529 2% Unidentifiable 357-2,425,113-11% 119 1,411,593 0% 213 3,836,706 1% Other land 345 7,251,503 34% 235 9,102,245 3% 62 1,850,742 1% Involuntary conversions ,666 3% ,634 0% ,968 0% Residences 331 2,774,533 13% 90 4,171,157 1% 23 1,396,624 0% Put and call options ,454-2% ,433 0% ,887 0% Farmland 72 2,512,736 12% 57 2,602,525 1% 8 89,789 0% Timber ,529 3% ,709 0% 6 11,181 0% Futures contracts ,446 1% ,329 0% ,883 0% N/A--Not applicable. Notes: Detail may not add to totals because of rounding. Sales price minus basis does not alw ays equal gain or loss because: (a) only the gain is reported for capital gain distributions from mutual funds and pass-through gains or losses, (b) part of the total gain or loss on certain deprecibale assets is treated as ordinary income rather than capital gain or loss, (c) in certain cases w here taxpayers reported futures contracts w ith a loss, the sales price and b and (d) some sales may have non-deductible losses or non-taxable gains such as w ash sales, or sales of principal residences, and these transactions are not balanced.

12 Trends 20 states followed the federal treatment of capital gains in 2001 in 2013 only 9 did. Only Idaho, Massachusetts, and Mississippi expanded the base (Idaho used to exempt 80% of certain gains now 60%; MA used to exempt capital gains on assets held over five years; MS used to exempt certain state business gains) Most of the changes related to qualified business sales (OK, IL, LA, VA, VT, MT, NY Montana doubled the size of its capital gains credit from 1% to 2% There have been proposals to tax capital gains: Washington Some looking to exempt more: Arizona is phasing in an exemption of 25%; North Carolina may consider exemption of capital gains

13 Contact Info: Norton Francis Website: Data for state treatment comes from state tax departments and the Wisconsin Legislative Fiscal Bureau Individual Income Tax Provisions in the States 13