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Missouri has become the first U.S. state to eliminate capital gains taxation, setting a new precedent in state tax policy but raising questions over long-term fiscal stability. The measure, which exempts profits from the sale of stocks, real estate, and digital assets from state income tax, takes effect Aug. 28 and applies retroactively to gains realized since Jan. 1.
The change positions Missouri as a national outlier in its treatment of investment income, a move hailed by proponents as a tool to spur economic growth but flagged by analysts as a potential budgetary liability.
A Historic Exemption
The new law, championed by Republican lawmakers and signed by Gov. Mike Kehoe, removes capital gains entirely from Missouri’s taxable base. The state revenue department is already preparing updated income tax forms for April filings.
No other state has fully exempted capital gains. While states such as Florida and Texas avoid personal income tax altogether, Missouri’s decision to target a specific income stream — one largely benefiting wealthier households — breaks new ground in tax design.
Revenue at Risk
Official fiscal estimates suggest the exemption will cost the state roughly $157 million in FY2025 and $111 million annually thereafter. But updated projections warn the impact could be far higher. Based on $13.3 billion in reported capital gains income in 2022, forecasters note the revenue loss could approach $625 million annually once fully phased in.
That figure would erase nearly 5% of Missouri’s annual general revenues. Budget officials have already warned of a $1 billion shortfall by FY2027, driven by rising obligations in Medicaid and education.
“The ongoing revenues simply won’t keep pace with the commitments already built into the FY2026 budget,” the Office of Administration said in June.
Political Trade-Offs
Supporters argue the exemption will encourage investment and reward savers. “We’re sending a strong message that Missouri values entrepreneurs and investors,” said House Speaker Pro Tem Chad Perkins, the bill’s sponsor.
Critics counter that the benefits will accrue disproportionately to high-income households, while the fiscal burden falls on public services. “It’s a windfall for the wealthiest taxpayers at the expense of schools and healthcare,” said policy analysts at the Institute for Taxation and Economic Policy, which flagged the higher $625 million revenue-loss scenario earlier this year.
A Wider Tax Picture
The repeal comes as Missouri trims other taxes as well, including removing sales tax on diapers and feminine hygiene products. But capital gains dominate the fiscal conversation, as they represent one of the state’s most volatile revenue sources.
The timing also intersects with federal tax changes. Adjustments to federal income tax treatment of investment gains will ripple through state returns, compounding Missouri’s revenue exposure.
Looking Ahead
For taxpayers, the change represents a significant savings opportunity. High-net-worth individuals, in particular, stand to benefit given their larger exposure to equity markets and real estate. For the state, however, the question is whether short-term growth gains outweigh long-term fiscal strain.
Investors and tax advisers are watching closely. The exemption could enhance Missouri’s attractiveness for asset managers, retirees, and entrepreneurs seeking a low-tax environment. But ratings agencies and public finance experts may take a different view if projected deficits materialize.
Ultimately, Missouri’s move underscores the tension between tax competition and fiscal sustainability. With nearly every U.S. state reassessing its revenue mix amid slowing federal aid and rising costs, Missouri’s experiment will serve as a critical test case — one that could either cement its reputation as an investor-friendly hub or saddle future budgets with structural deficits.
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