Indexing Capital Gains Would Add to Deficit, Adversely Impact State Budgets and Imperil Medicaid Funding

Even though the Trump Administration almost certainly lacks the authority to do so, press reports indicate that the Administration is considering issuing a new regulation to provide another large tax cut for the wealthy. The regulation would index capital gains for inflation, substantially lowering the amounts that would be subject to taxation.

As the Center on Budget and Policy Priorities and the Tax Policy Center both explain, the benefits of the tax cut would skew overwhelmingly to those with the highest-incomes, would add another $100 billion to $200 billion over the next decade to already ballooning federal budget deficits driven by last year’s tax legislation, and lead to extensive use of tax sheltering schemes.

But such a regulation would also adversely affect state budgets. As the Center on Budget and Policy Priorities points out: “It could also cost state governments billions in lost revenue, as most states base their income taxes on the federal definition of capital gains. This would leave less state revenue to invest in public education, health care, public safety, and human services.” Unless states decouple from the federal definition, there would be a significant risk the regulation could result in spending cuts to Medicaid and the Children’s Health Insurance Program (CHIP) affecting millions of low-income children and families, as states compensate for the resulting reduction in their tax revenues.

Of course, more broadly, large and growing federal budget deficits would also fuel continued conservative efforts to institute deep Medicaid cuts by capping federal funding for states through per capita caps or block grants.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.