Budget & Tax
Capital gains volatility
April 13, 2018
The drop in oil prices that began at the end of 2014 challenged Oklahoma’s economy and, in turn, the state’s budget. A phrase often heard when discussing this is that Oklahoma needs more stable revenues. This could be done by relying on less volatile sources of revenue, or it could happen as a result of Oklahoma’s economy becoming more diverse and less dependent on energy and agriculture. Yet many tax consumers, in practice, ignore the issue altogether and call for increased taxes on anything and everything. They have recently focused on the capital gains deduction.
While removing the capital gains deduction would bring in additional revenue, it would also become one more unstable revenue source. As the Incentive Evaluation Commission has shown in its report, the forgone revenue from the deduction has varied greatly from year to year. (Note: the chart below is from the State of Oklahoma Incentive Evaluation Commission Capital Gains Deduction Evaluation; numbers are in nominal dollars.)
There has been no consistent trend of how much has been claimed through the deduction since its inception in 2005. Even the number of claims made is not a great indication of the actual amount deducted each year. (Note: the chart below is from the State of Oklahoma Incentive Evaluation Commission Capital Gains Deduction Evaluation; numbers are in nominal dollars.)
This follows the same trend, or lack thereof, with national data collected by the Congressional Budget Office on realized capital gains. As the chart shows, the same sort of variability in Oklahoma’s data can be seen in the national data as well.
Being able to accurately predict how much revenue is going to be brought to the state is a crucial aspect of the budgeting process. While Oklahoma’s economy is still heavily tied to cyclical industries like agriculture and oil and gas, downturns can be exacerbated by an unexpected fall in tax revenues from other volatile sources of revenue. Recent articles have pointed to additional problems removing the deduction could cause. Creating a responsible, simple, and stable revenue base is important when building a state. Removing the capital gains deduction would do nothing to achieve this.