Budget & Tax

Capital gains taxes: Facts and myths

April 6, 2018

Trent England

In 2004, Oklahoma voters exempted some investments from the state income tax on capital gains. What does that mean? How does it work? And what about claims that this is a “handout” or only for “the rich”?

Fact: “Capital gains” is what you get when you own a house, rent property, other types of property, land, farm or business and it goes up in value—when you sell it, your profit is called capital gains. When an income tax is applied to this kind of profit, it’s called a capital gains tax.

Fact: In states like Texas, where there is no income tax, there is no capital gains tax. Taxes on income, including capital gains, are often disfavored because they create a disincentive to create value by working, improving property, or building a business.

Fact: It was Oklahoma voters, in 2004, who passed a tax reform measure (see page 34) with an exemption from capital gains taxes for property and business that are located within the state of Oklahoma. The idea was to increase the incentive for people to invest in Oklahoma, and to put Oklahoma properties and business on an equal footing with Texas.

Myth: “Only rich people pay capital gains taxes.” While many homeowners are exempt from capital gains taxes, some are not. And anyone who owns investment property or a farm or business—big or small—can feel the bite of capital gains taxes.

Myth: “Oklahoma’s capital gains tax exemption is a handout.” This is false because all the exemption does is let people keep some of their own money, the fruits of their own hard work.

Myth: “Increasing capital gains taxes will not hurt our economy.” Nobody should believe this, when politician after politician has told us that increasing taxes on cigarettes will reduce smoking. Every tax creates a disincentive. The question is, how important is the behavior we are taxing. When it comes to investing in Oklahoma, if that is something we want, the last thing we should do is penalize it with a capital gains tax.