Could a surprise flood of money appear in the California treasury due to the presidential campaign? It’s possible…although probably too late for this year’s budget even if the budget scrum rolls on through the summer.
An investment advisor in the Wall Street Journal looks into his crystal ball to determine what investors should do as they watch the battle for the White House. One key tax rate he suggests investors watch is the capital-gains tax rate.
Capital gains taxes have led to bulging California budgets in the past. The boom of 2000 was in great part due to high tech entrepreneurs cashing in on their capital gains.
Another opportune time to cash in on capital gains might be at hand again because of the presidential contest. While Republican candidate John McCain says he wants to leave the present capital gains rate of 15% alone, both Democratic candidates Barack Obama and Hillary Clinton favor raising the capital gains tax rate.
With pundits claiming the presidency could fall to the Democrats, investors will consider what to do with any major capital gains they have earned. If, as the campaign rolls through the Fall, it appears the Democratic candidate has the upper hand, these investors might begin cashing out.
In California that could bring a temporary windfall. This might seem like a good reason, from a California perspective, to vote for the Democratic candidate. But, if that candidate does become president and raises the capital gains tax rate, future revenues to the treasury may slow to a trickle.
For both the short term and the long term, California should consider a capital gains cut of its own. Capital gains are currently taxed at the taxpayer’s full tax rate. Lowering the capital gains rate could free up some revenue immediately for the strapped California budget. More on that in some future post.
In the meantime, California investors will have to sit back and watch what the feds do.