Scottsdale: Arizona House Votes to Double Capital Gains Tax Break, Sending $23 Million Cut to Senate

The Arizona House of Representatives voted 35-25 Wednesday to double the state tax deduction for long-term capital gains, a move that legislative analysts say will cost the state $23 million in annual revenue once fully implemented.

The measure, HB 2528, now heads to the Senate for consideration.

A deduction that favors the wealthy

Under current Arizona law, profits from investments held longer than one year receive a 25 percent deduction when calculating state income taxes. HB 2528 would increase that deduction to 50 percent.

The benefit would not be evenly distributed.

According to an impact analysis cited during the House debate, the top earners would capture the largest share of the tax break:

• People with adjusted gross incomes between $10,000 and $20,000 would receive just 1 percent of the total tax savings.
• Those earning $200,000 to $500,000 would receive 12 percent.
• Arizonans earning $1 million to $5 million would receive 26 percent.
• The 183 residents making more than $5 million a year would receive 22 percent of the total, or $5.2 million combined. That works out to an average of more than $27,000 per person.

Lawmakers clash over who benefits

Rep. Mitzi Epstein, D-Tempe, pushed back against the bill during the House floor debate. She argued the revenue loss should go toward state priorities like raising teacher pay.

"The change, once fully implemented, will cut state revenues by $23 million a year. That is money that should be used for other state needs, like hiking teacher pay."

Epstein offered an amendment to limit the expanded deduction to residents age 65 and older with incomes below $75,000. The amendment failed.

House Speaker J.D. Mesnard, R-Chandler, defended the bill as a way to encourage investment.

"Capital gains is investment in the economy. Investment in the economy is good for everybody. And we want to encourage that as much as possible."

Epstein countered that investors do not need to put their money in Arizona to qualify for the state tax break.

"People could invest in the wonderful place that is Dubai, or China or anywhere on earth. They invest there, they live in Arizona, and they get to not pay for anything that is going on in Arizona where they are reaping the benefits."

Mesnard argued that Arizonans who live and spend in the state benefit the economy regardless of where their investments are located.

Scottsdale lawmaker defends the bill

Rep. Jay Lawrence, R-Scottsdale, spoke in favor of HB 2528 during the debate. He argued that higher-income residents already shoulder the largest share of the state tax burden.

"The rich people pay 80 to 85 percent of the taxes from which we all benefit. The lower income people, about who Rep. Epstein is defending, 10 percent of those people pay zero percent in taxes."

Rep. Kirsten Engel, D-Tucson, responded by calling the argument "trickle-down economics."

What happens next

HB 2528 now moves to the Arizona Senate, where it will face committee review and a potential floor vote. The bill has not yet been assigned a Senate committee.

If it clears the Senate and is signed by Gov. Katie Hobbs, the expanded deduction would begin phasing in for the next tax filing season. The full $23 million annual revenue loss would be realized once the deduction reaches its maximum 50 percent level.