Top Combined Capital Gains Tax Rates Would Average 48 Percent Under Biden’s Tax Plan

April 23, 2021

President Joe Biden’s American Families Plan will likely include a large increase in the top federal tax rate on long-term capital gains and qualified dividends, from 23.8 percent today to 39.6 percent for higher earners. When including the net investment income tax, the top federal rate on capital gains would be 43.4 percent. Rates would be even higher in many U.S. states due to state and local capital gains taxes, leading to a combined average rate of 48 percent compared to about 29 percent under current law.

A high combined capital gains tax rate would influence when taxpayers decide to sell assets and realize the gain. If the effect is large enough, federal revenue from capital gains income would decline because taxpayers have decided to avoid realizing gains and the higher tax rate.

Most states levy their individual income tax rates on long-term capital gains and qualified dividends, though Hawaii levies lower tax rates. Nine states provide general exclusions or deductions for long-term capital gains. The average top tax rate on capital gains at the state level is about 5.2 percent, for a combined average rate of 29 percent under current law. If the top federal capital gains rate rises to 43.4 percent, this would raise the combined tax rate on long-term capital gains to 48.4 percent.

Biden capital gains tax rates, Biden capital gains tax proposal. Compare combined capital gains rates under Biden tax plan fv3-01

Thirteen states and the District of Columbia would have a top combined capital gains tax rate north of 50 percent. California, New York, and New Jersey would have combined rates of more than 54 percent. Top combined rates in some localities would go even higher. For example, New York City levies a local capital gains rate of 3.876 percent, which means an investor would pay an all-in rate of nearly 58.2 percent. Residents of Portland, Oregon would face a top capital gains rate of 57.3 percent.

Using the Tax Foundation General Equilibrium Model, we find that raising the top capital gains tax rate to 39.6 percent for those earning over $1 million would reduce long-run GDP by about 0.1 percent and reduce federal revenue by about $124 billion over 10 years.

Economic and Revenue Impact of Raising the Top Capital Gains Rate to 39.6 Percent for Those Earning over $1 Million 
Gross Domestic Product (GDP) -0.1%
Gross National Product (GNP) -0.2%
Capital Stock -0.1%
Wage Rate -0.1%
Full-Time Equivalent Jobs -15,000
Conventional 10-Year Revenue, 2022 to 2031 -$123.5
Dynamic 10-Year Revenue, 2022 to 2031 -$132.9

Source: Tax Foundation General Equilibrium Model, March 2021.

Under Biden’s proposal for capital gains, the U.S. economy would be smaller, American incomes would be reduced, and federal revenue would also drop due to fewer capital gains realizations. Other proposals, such as partially repealing step-up in basis for capital gains, may help offset the realization effect and increase federal revenue, but it remains important to consider the combined tax rate on capital gains in the context of the President’s tax proposals.

Top Marginal Capital Gains Tax Rates Under Current Law and Biden Capital Gains Tax Proposal
  Top Capital Gains Rate (Current Law) Top Capital Gains Rate (Proposed)
Alabama 28.8% 46.4%
Alaska 23.8% 43.4%
Arizona 29.8% 49.4%
Arkansas 26.8% 46.4%
California 37.1% 56.7%
Colorado 28.4% 48.0%
Connecticut 30.8% 50.4%
D.C. 32.8% 52.4%
Delaware 30.4% 50.0%
Florida 23.8% 43.4%
Georgia 29.6% 49.2%
Hawaii 31.1% 50.7%
Idaho 30.7% 50.3%
Illinois 28.8% 48.4%
Indiana 27.0% 46.6%
Iowa 32.3% 48.6%
Kansas 29.5% 49.1%
Kentucky 28.8% 48.4%
Louisiana 29.8% 47.0%
Maine 31.0% 50.6%
Maryland 29.6% 49.2%
Massachusetts 28.8% 48.4%
Michigan 28.1% 47.7%
Minnesota 33.7% 53.3%
Mississippi 28.8% 48.4%
Missouri 29.2% 48.8%
Montana 30.6% 50.2%
Nebraska 30.6% 50.2%
Nevada 23.8% 43.4%
New Hampshire 28.8% 48.4%
New Jersey 34.6% 54.2%
New Mexico 27.3% 46.9%
New York 34.7% 54.3%
North Carolina 29.1% 48.7%
North Dakota 25.5% 45.1%
Ohio 28.6% 48.2%
Oklahoma 28.8% 48.4%
Oregon 33.7% 53.3%
Pennsylvania 26.9% 46.5%
Rhode Island 29.8% 49.4%
South Carolina 27.7% 47.3%
South Dakota 23.8% 43.4%
Tennessee 23.8% 43.4%
Texas 23.8% 43.4%
Utah 28.8% 48.4%
Vermont 32.6% 52.2%
Virginia 29.6% 49.2%
Washington 23.8% 43.4%
West Virginia 30.3% 49.9%
Wisconsin 29.2% 48.8%
Wyoming 23.8% 43.4%
Average (unweighted) 29.0% 48.4%

Source: Tax Foundation calculations, state statutes.

Errata: This piece has been updated to include the effect of state tax exclusions and deductions for capital gains.

Launch Resource Center: President Biden’s Tax Proposals

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An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

A capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.