Why the Oregon Capital Gains Tax Should Be Repealed

Last week Cascade Policy Institute released a report analyzing Oregon’s relatively high capital gains tax. Why the Oregon Capital Gains Tax Should Be Repealed details why the Oregon capital gains tax punishes the very thing that encourages growth in the Oregon economy and puts the state at a competitive disadvantage with its neighbor to the north. The report was published as part of Cascade Policy Institute’s Oregon Economic Opportunity Project.

Why the Oregon Capital Gains Tax Should Be Repealed was written by Elizabeth Harrison. A recent valedictorian of Hillsdale College, Elizabeth Harrison has a degree in economics and mathematics. Ms. Harrison was a recipient of The Woodard Family Fellowship at Cascade Policy Institute. The Woodard Family Fellowship is a research position generously sponsored by a grant from The Woodard Family Foundation of Cottage Grove, Oregon.

“A high capital gains tax rate discourages investors from investing their capital in businesses and entrepreneurial projects that would create greater value,” writes Harrison. “Removing the tax would both encourage and reward the wise investment of capital in projects that would assist the growth of the economy”¦.

“While the capital gains tax rate has declined nationally, Oregon’s capital gains tax rate has remained high. Oregon’s high total capital gains tax rate increases the greater disparity between Oregon and other states. This encourages the departure of productive endeavors out of the state to other more business-friendly states, and Oregon suffers because of it”¦.

“A repeal of the capital gains tax”¦would help the largest group of capital gains taxpayers in Oregon: the middle class. There are approximately 48,000 middle-class capital gains taxpayers, compared to only 31,000 high-income capital gains taxpayers. A capital gains tax repeal would help high-income earners more in terms of gross dollar amounts (because they pay the most), but it would help a greater number of individual middle-class taxpayers.

“While the federal capital gains tax rate has seen a recent drop, Oregon’s capital gains rate has remained at 9%, placing Oregon as the third highest in the nation, behind New York and California. Given Oregon’s high capital gains tax rates, individuals and businesses have incentive to go elsewhere with their capital in order to protect their profits from an eventual sale. For any individuals attempting to decide where to invest, all other things being equal, a comparison of the capital gains tax rate could be the deciding factor.

“”¦In a study evaluating annual averages from 1993 to 2002, 337 residents moved from Oregon to Clark County, Washington with an average net capital gain of $114,117, as opposed to the $20,058 average net capital gain from the prior year. These residents likely moved from Oregon in order to avoid the high tax rate of 9% on capital gains (Washington has no income tax), and any residents who leave because of the high capital gains tax rates will take any possible revenue from their gains with them.”

Harrison concludes, “The United States Treasury acknowledges that lower capital gains rates benefit our economy, stating the following: “˜The lower the capital gains tax rate, the more the entrepreneurs and inventors of America will apply their energies and talents. Thus, a low capital gains tax rate is vital to maintaining the strength of the economy into the future.'”

Why the Oregon Capital Gains Tax Should Be Repealed is the latest publication of the Oregon Economic Opportunity Project. The Oregon Economic Opportunity Project seeks to engage the citizens of Oregon, the media, and state and local lawmakers in an in-depth discussion about economic opportunity in Oregon and to move forward in a direction that creates a healthy, dynamic economic climate in the state. More Cascade publications can be found at www.cascadepolicy.org.

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For more information about this report and the Oregon Economic Opportunity Project, please contact Steve Buckstein.