Week in Insights: Capital Gains Taxes Deserve More Consideration

In 2021, Washington state passed a 7% capital gains tax on the sale or exchange of stocks, bonds, or other assets in amounts greater than $250,000. The tax was expected to bring in as much as $250 million in its first full year. Actual receipts totaled nearly $850 million.

This highlights two interrelated truths: There’s much more under-taxed wealth than we realize, and states without capital gains taxes give up significant sources of potential cash.

Eight states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming—have no capital gains tax, and nine more have rates much lower than their ordinary income rate. Unsurprisingly, those states all impose sales tax or property tax rates higher than the national average.

Relying on sales tax has its shortcomings; sales taxes likely are regressive and effectively never progressive. Property taxes also are regressive, because they’re tied to the underlying value of the property rather than income. Placing the budgetary onus on those taxes distributes the revenue load equally—not equitably—across the income strata.

Multiple states have reported revenue shortfalls. One example is New Jersey, where the state treasury department expects to take in $1.2 billion less in income tax revenue for 2023.

In a revenue crunch, sales tax hikes too often are plan A. By contrast, Washington provides a lodestar for steering state politics toward equitable, effective tax policy.

Here at Bloomberg Tax, we aim to be your guide on the ever-changing seas of tax matters. Leveraging insights and expertise of industry frontrunners, we bring you in-depth analyses and expert opinions to facilitate informed decisions.

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—Andrew Leahey

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social

Image of the Washington State Legislative Building in Olympia, Wash.

Photographer: Leah Nash for the Washington Post via Getty Images

State Insights

CohnReznick’s Cynthia Galamgam reviews the nuances of New York’s pass-through entity tax and various issues that Pennsylvania should consider before it enacts the tax.

Federal Insights

The Supreme Court should use its upcoming decision in Moore v. United States to craft guidelines so Congress can impose an accurate tax on constructively received income, says Greenberg Glusker’s Thomas Giordano-Lascari.

Donald Zidik of Grassi & Co. CPAs and Eileen Reichenberg Sherr of the AICPA explain who qualifies for two specific federal education tax credits and how tax practitioners can help eligible clients apply for them.

A US regulator’s proposal to make auditors more responsible for clients’ noncompliance shows a lack of consideration for potential negative consequences, says attorney Jim Peterson.

Global Insights

Matthew Greene and Pavlos Theodoulou of Stewarts review the Upper Tribunal’s decision in a recent case providing guidance on the “exceptional circumstances” provision of the statutory residence test in determining UK residency status.

Plante Moran’s Steve Schnepel and Randall Janiczek discuss ways that businesses can navigate the complex changes to downward attribution rules in the tax code and avoid significant stock reporting obligations.

The UK paymaster services concession allows for staff costs between associated companies to be taken out of the scope of value-added tax, but organizations need to be aware of potential complications, as Robert Marchant of Crowe explains.

Peter Fairchild of Crowe explains the UK tax rules that apply to nonresident entertainers and sportspeople and how these individuals can be affected by the application of tax to their global endorsement income.

Columnist Corner

Massachusetts recently passed a 4% tax on millionaires to provide students with free school lunches. In this week’s Technically Speaking, Andrew Leahey writes that it’s bad policy to tie free school lunches to state funding, and that reimplementing the federal free student lunch program would be more effective.

Save the Date

Professionals—even risk-averse ones—can use chatbots such as ChatGPT to make their jobs easier. To see how you can start using generative AI today, join the Bloomberg Tax and Bloomberg Law Insights & Commentary teams on Sept. 28 from noon to 1 p.m. ET for the latest installment of our free virtual Lunch & Learn series.

SMB Law Group’s Eric Pacifici and Kevin Henderson will explain how AI can boost efficiency while steering clear of privacy, confidentiality, security, and intellectual property minefields.

Career Moves

Yasmin Nelson has joined Holland & Knight as a senior policy adviser in the public policy and regulation group in Washington.

Marcus Schmidbauer has joined Kramer Levin as a tax partner in the Paris office.

Denise D. Nordheimer has joined Fox Rothschild as a partner in the taxation and wealth planning department in Wilmington, Del.

Phan Thi Lieu has joined Dentons LuatViet as senior partner.

Jason C. Ray has joined Blank Rome as a partner in the tax, benefits, and private client group in the Dallas office.

Justin M. Piccione has joined as a partner and Diana Chen has been promoted to partner with McLaughlin & Stern’s trusts and estates practice in New York.

If you are changing jobs or being promoted, let us know. You can email your submission to TaxMoves@bloombergindustry.com for consideration.

News Roundup

It’s been another busy week in tax news from state capitals to Washington. Here are some stories you might have missed from our Bloomberg Tax news team.
*Note: Your Bloomberg Tax login is required to access Tax News.

• Congressional tax-writers started their trek back to Washington with plans to consider a Taiwan tax bill, scrutinize the global tax deal, and hash out funding for the IRS.
• UK high court judges ruled against Scottish Power Ltd in a case about whether £28 million ($35.17 million) spent by the company on customer compensation was deductible for corporation tax.
• The US risks a government shutdown early next month, with Congress short on time to reach a temporary spending deal and House conservatives vowing to disrupt negotiations unless their demands for cuts are met.
• The IRS will intensify its enforcement efforts on wealthy taxpayers and large partnerships starting as soon as this month, the agency said.

Wind turbines operated by Scottish Power are pictured at Whitelee Onshore Windfarm on Eaglesham Moor, southwest of Glasgow, Scotland, on Jan. 17, 2022.

Photographer: Andy Buchanan/AFP via Getty Images

Tax Journals

With beneficial ownership reporting requirements under the Corporate Transparency Act soon to take effect, McDermott’s Harry T. Dao and Elise J. McGee examine whether family-owned entities can lessen their compliance burden through a regulated private trust company.

*Note: Your Bloomberg Tax login is required to access Tax Journal articles.

Tax Pro Week

Every tax professional wishes they could make one change in the tax world—a revision to the federal tax code, a state tax deduction, clear agency guidance—the list goes on. We’re collecting a series of short essays highlighting practitioners’ thoughts about, and solutions to, some of the most challenging rules for tax practitioners.

For this series, submissions should be no more than 300 words. We’ll publish five responses on The Exchange, one per day, from Oct. 23–27 during what we call Tax Pro Week. The deadline for submissions is Sept. 29, 2023.

Photo Illustration: Jonathan Hurtarte/Bloomberg Tax; Photos: Getty Images

Our Wish List

We’re in the middle of the Atlantic hurricane season, so for September, we’re calling for submissions on storm preparedness and casualty loss.

We’d also welcome articles that discuss retirement planning. This can include the impact of SECURE 2.0, changes to retirement regulations around the world, common mistakes companies make when setting up retirement packages, and how taxpayers can benefit from retirement tax deferrals (besides through IRA, Roth, and 401(k) plans).

If you have an interesting, never-published article for publication, you can contact our Insights team by email at TaxInsights@bloombergindustry.com.

Our Team

We talk about tax a lot. But there’s much more that you might hear us talking about if you popped into one of our Teams meetings. Here’s a quick look at what some of us are watching, reading, and listening to this week.

Watching
Melanie Cohen (Content Editor): “Not Others,” a comedy drama about a mother who had a daughter at age 18. The two have basically grown up together.

Reading
Andrew Leahey (Columnist): “An Introduction to Legal Reasoning” by Edward Levi. I’ve been on the lookout for materials to suggest to non-law major undergraduate students interested in pursuing a career in law and have found Levi’s seminal 1949 treatise to be a great primer.

Listening
Daniel Xu (Content Editor): I’m excited to see jazz singer Laufey perform live, so I’ve been listening to her music in anticipation.

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