State governments derive their revenue from a number of sources, with the individual income tax being one of the most important. Fluctuations in economic activity, particularly in the level of wages and capital income, will influence the level of revenue generated from the income tax. This paper analyzes the impact of recent trends in capital gains realizations on state income taxes. We look at the growth of capital gains relative to the overall tax base and find that the significant growth in capital gains in the 1990s has added to the fiscal pressure that states now face.
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