Capital gains deduction is an expensive loophole benefiting a small number of Oklahomans (Guest post: Cynthia Rogers, Ph.D)

Cynthia Rogers, PhD, is a professor of economics at the University of Oklahoma and a commissioner on the State of Oklahoma’s Incentive Evaluation Commission.

The Capital Gains Tax Deduction allows Oklahoma taxpayers to avoid paying taxes on income from the sale of Oklahoma real estate or stock in an Oklahoma-based firm where the assets have been held for a sufficient period (68 OS § 2358). The goal of the deduction seems to be to promote investment and access to capital for Oklahoma-based firms.

In an analysis for the state’s Incentive Evaluation Commission, PFM Group Consulting, LLC recommended that the capital gains tax deduction be eliminated. PFM concluded that the program cannot be shown to generate a positive return on investment for the state with the available data. As an IEC commissioner and an economist, I agree.

The capital gains tax deduction led to an estimated $474 million in forgone tax revenues from 2010 to 2014.  Averaging over $100 million per year, it is among the largest incentive programs in the state. For comparison, the Quality Jobs Program averages around $73 million per year.

Unlike other large incentive programs, however, the capital gains tax deduction does not link program expenditures to measurable outcomes, such as jobs, income, or investment growth.

There is no credible evidence that the deduction leads to more investment in Oklahoma companies. PFM concluded that the deduction stimulated only $9 million in additional tax revenue, leading to a net cost of $465 million to the state budget. They acknowledge that the data needed to evaluate the effectiveness of the program are lacking.

The program benefits a small number of the wealthiest Oklahomans.  Based on data provided by the Oklahoma Tax Commission, 17,274 taxpayers claimed the deduction in 2014. Of these 824 had federal adjusted gross income of $1 million or more. This top income group claimed a remarkable 64 percent of the total capital gains tax deduction. At the same time, only 6 percent of the deduction went to households making less than $100,000 per year, which account for 86 percent of all households in Oklahoma.

There is no way to assess whether individuals receiving the credit invest more in Oklahoma companies due to the deduction. There is no evidence of a net increase in the value of Oklahoma stocks or real estate. Surprisingly little is known about how investors use the extra income generated from using the deduction. Are these extra gains plowed back into Oklahoma assets?

Clearly, individuals use the capital gains tax deduction for tax planning purposes. It is unclear, however, if this tax loophole leads to measurable economic outcomes for the state. Lacking such accountability and measurable performance goals, the Capital Gains Tax Deduction should be eliminated unless it can be shown to be effective.

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