Support the NH Capital Gains and Estate Tax Amendments

By Michael Marsh

A century of Republican control of our state legislature has left New Hampshire with the seventh most regressive tax system in the country. Working people pay four times as much of their income in state and local taxes here than the wealthiest New Hampshire residents. This did not happen by accident, but because previous legislatures consistently voted to increase those taxes that affected working people. The Housebudget includes two provisions that will reverse this policy; the Senate budget does not.

The first provision is a change to our estate tax law, which was in place for 70 years before it was effectively eliminated by Congress under President Bush in 2001. The change puts an 8% tax on estates larger than $2 million (or $4 million for a couple if they havedone estate planning). This will affect only the wealthiest New Hampshire estates – barely 100 people per year. Here are a few facts about the change:

1. The estate tax limits the further concentration of wealth in this state and will help rebuild a strong middle class.
2. The estate tax will not affect 99% of the estates in New Hampshire. Every penny will be paid by individuals with at least $2 million in assets or couples with $4 million.
3. The tax protects surviving spouses because an estate transferred to a spouse is tax-free.
4. These changes to our estate tax will make our tax system more just. It is not fair that a working person pays state taxes every time he goes to a fast-food restaurant for lunch but a wealthy individual who inherits an estate worth millions pays nothing at all.
5. The tax is modest – for a couple with a $5 million estate, the effective tax rate is less than 2%.
6. The tax follows the current federal estate tax rules which include important exceptions that protect family farms and small businesses.
7. The tax encourages giving to charities because all charitable gifts are tax deductible.

The second important tax provision in the budget is an expansion to our current Interest and Dividends tax. Today we have a 5% state tax on most forms of unearned income, including interest, dividends, and taxable annuities. This tax raised $117 million last year. The budgetextends this tax to include the largest source of unearned income: capital gains. Capital gains are the profits on the sale of assets like stocks, businesses, and real estate. The expansion will also allow usto finally increase the exemption for interest and dividends, reducingthe tax on the fixed-income poor who depend on CD’s and savingsaccounts. In a good year, the capital gains tax could bring in $150 million or more in new revenues. Even in today’s economy, the revenue will be at least $50 million per year. Here are some facts about the capital gains tax:

1. Who will pay this tax? Overwhelmingly, it will be paid by wealthy New Hampshire residents. In 2006, the last year the IRS has complete data, more than 92% of the capital gains tax would have been paid by people making more than $200,000 per year, and less than 1% of it would be paid by people making under $100,000.
2. If you are a middle class tax payer, your federal income tax rate is 25%. If you are a wealthy person with a long-term capital gain of any size whatsoever – even millions of dollars – your tax rate is 15%. It is simply not fair that people should pay higher taxes on income earned from working than they do on unearned income. At the minimum, they should be taxed the same. The capital gains tax provision in the budget will start to make these tax rates more even.
3. Capital gains on the sale of a primary residence are protected. There is a $250,000 exemption ($500,000 for a couple), and only gains above this amount are taxable.
4. The bill reduces the tax on small savers because it more than doubles the amount of interest and dividends income that is exempt from tax, from the current $2,400 per person to $5,000 (or $10,000 for a couple).
5. For the great majority of working class and middle class people in this state, the changes to the Interest and Dividends tax in the budget will decrease the amount of tax they pay.

To pay for a range of social services that people depend on, the state has a serious need for additional revenue. This is true not just in the current economic recession, but in normal years as well, because we have a structural budget deficit. The capital gains and estate taxes will address that structural deficit and are the most equitable way to raise new revenue to fund our state needs. They will go a long way tomake our tax system fairer for the working people of our state. Becausethe taxes are modest in scope, they will not affect businesses or investment decisions. They will make New Hampshire a better place to live.